The swift rise in China's real estate prices was largely driven by rapid economic growth and the process of urbanization, in our opinion. China's gross domestic product growth averaged 10.6% from 2003 to 2007, and the urbanization ratio--the percentage of its population living in cities-- increased to 43.6% in 2006 from 39.09% in 2002.
However, the price escalation was also caused by the appreciation of China's currency, which began in 2005 and led to excessive speculative investments in China's real estate market. We think this helped create a bubble in the housing market. The housing price/income ratio of eight major cities in China increased to 12 by the middle of 2007 from 10 in the middle of 2006, according to WIND, a financial data provider in China. Housing prices became unsustainably high, and as economic and regulatory conditions became increasingly unfavorable in late 2007, housing transaction volume declined and the housing market softened. The volume of housing transactions in China's major cities declined more than 20% in December 2007 compared with December 2006. For the past several months, transaction volume has continued to decline, and countrywide transaction volume declined 24% in July compared with same period of 2007.
