Keynes and Hayek in the property market

Real-estate prices in China's top cities are spiking, generating contradictory predictions of either a bursting bubble or a coming economic turnaround. What's really going on in China's property markets?

The National Bureau of Statistics revealed recently that 10 of the 70 large and medium-sized cities surveyed had recorded annual price increases of more than 20 percent for newly built commercial housing. In the first-tier cities of Shanghai and Shenzhen, those gains were even higher: above 37 percent. In the second-tier cities of Xiamen and Hefei, they exceeded 40 percent.

In 42 of the cities surveyed - those with industrial overcapacity and excessive property inventories - price increases amounted to less than 5 percent, with eight cities recording falling or stagnant property prices. This pattern of divergence creates a dilemma for Chinese policymakers and investors, who now must weigh carefully the insights of two economic giants: John Maynard Keynes and Friedrich Hayek.