What is Happening with China Home Prices?

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Home prices continue to skyrocket in China, defying government intervention and rational analysis.

The total value of homes sold in China in September was 34 percent higher than in August, according to the latest data from the National Bureau of Statistics. Sales in the first nine months were 34.5 percent higher than a year earlier, according to the data.

While those numbers may best represent the increasing volume of transactions, prices are also going up. The average price of a new 100 cities tracked by the China Index Academy was 9.48 percent higher in September from a year earlier. The price index was 1.07 percent higher than August and prices are rising faster than previous months, according to the firm, a subsidiary of real estate portal Soofun.

While analysts are debating the long term impact of the data, they generally agree on one thing - government measures to curb the market are not working.

The latest price increases reflect a "continued trend of gradually weakening effect" of price controls introduced since 2010, the Academy said.

Chinese developers have been the main beneficiaries. Developer Country Garden last week announced it had exceeded its 2013 property sales target by the end of September.

Several factors are fueling sales, including a belief that prices are going to continue to rise and the availability of financing, analysts say.

"Home sales have been gathering pace since the end of August after banks loosened lending," Luo Yu, an analyst with CEBM Group, told Bloomberg. "Buying demand remains strong although more people are taking to the sidelines" after prices surged.

At the heart of the trend is the continued demand, which is still largely fueled by the domestic market, not speculators, some analysts say.

The rise in prices is product of GDP, wage inflation and urbanization, Junheng Li, head of research at JL Warren Capital LLC, wrote in a recent commentary for Forbes. Property is still seen as an attractive investment for Chinese, who have few alternatives, she argues.

Real estate continues to attract the most household investment in China, according to a recent report by Standard Chartered. Real estate typically represents more than 60 percent of a household's assets compared to 48 percent in the U.K. and 26 percent in the U.S., the firm found.

"Our research indicates that consumption driven purchase in major markets (T-1 and 2 cities) is robust, driven by wage inflation and urbanization," Ms. Li wrote. "Even if China's growth rate were to fall below 7 percent, the fundamental demand for property will remain strong. It's hard to see a scenario where the price of property stop rising in the medium and long term."

The latest housing news coincided with the release of data showing the Chinese economy grew 7.8 percent in the third quarter compared to a year earlier, the first increase in the rate of growth for three quarters. The economy grew 7.5 percent in the second quarter.

Some analysts have expressed concern that the continued rise in home prices and property investment might prompt the government to push harder to curb the market. Last week the government announced plans to issue more land for sale for residential projects, hoping to boost supply in the market.