Real Estate Industry
Safe as Houses?
A year and a half into the government’s housing market regulation scheme, property prices have at last begun to decline, but tensions remain high
“This is just the start. The worst will begin in the first quarter of 2012.”
On October 26 at the Imperial Scene housing complex in Shanghai’s sparkling Pudong district, 200 disgruntled homeowners staged a rare public protest in front of the sales office of the housing developer over its attempt to stimulate sales by slashing its prices. The owners feared that the value of their properties, bought at 22,000 yuan per square meter (US$383 per square foot), might shrink significantly now that the developer was reducing the price to 16,000 yuan per square meter (US$279 per square foot), a 27 percent drop.
In September and October, similar protests were held by homeowners in Beijing and other cities. Experts believe that the friction may signify the beginning of a downturn in China’s property market, whose unprecedented boom over the last decade has been plagued with runaway housing prices and public discontent.
Signs of Cooling
“This is just the start. The worst will begin in the first quarter of 2012, as it is unlikely that the central government will loosen its property regulation policy,” Luo Jiaming, an analyst from ICBC International, the global wing of one of China’s “big four” commercial banks, told NewsChina.
In an effort to control the overheating market, since early 2010, the central government has been implementing a package of policies restricting the purchase of housing. These have included raising down payments and forbidding the purchase of real estate where the buyer is not resident, as well as limiting the number of houses an individual can buy. The measures have targeted the hoarding of apartments by speculators, a practice largely responsible for the Chinese housing bubble.
Despite unfavorable financing policies and a drop in the number of eligible home buyers, real estate companies have been reluctant to lower prices, reasoning that a price reduction could cause panic among buyers already fearful of further price cuts; most real estate companies have planned to weather the government’s austerity policies by keeping enough cash in the coffers to see them through. The result was that by June 2011, after a year of strict regulation, house prices had dropped only marginally. However, trading volume has recently plunged into a downward spiral.
By the end of September, the total value of unsold houses on the market amounted to 531.4 billion yuan (US$83.3bn), 2.4 times the same figure at the end of June. In Shanghai, the trade volume of the property sector in the usually lucrative first three weeks of October dropped by 72 percent compared with the same period in 2010. Nationally, the total worth of housing inventory in the first three quarters of 2011 reached 1.2 trillion yuan (US$189.3bn), a 40.7 percent increase over the same period in 2010.
Stagnation of sales has put serious strain on the capital flow of property developers. According to the quarterly reports of 70 publicly traded real estate companies, 70 percent of them witnessed negative cash flow in the first three quarters. Even Longfor Properties, with the largest cash reserves of all 70 real estate developers (12.6bn yuan or US$1.97bn), resorted to price cuts.
In late October, rumors circulated that Greentown Group, one of China’s largest real estate companies, was on the brink of bankruptcy. Although Greentown’s CEO Song Weiping was swift to refute the allegation, there was no doubt that Greentown was nevertheless in real trouble, its liability rate rising to 160 percent and both sales and profit dropping rapidly.
Experts estimate that about one-third to 90 percent of real estate companies may be driven out of the market within five years if the current austerity policy continues. “The domestic real estate market has witnessed a change of direction,” said Xiao Li, executive vice-president of Vanke, China’s largest real estate company, in an investors’ teleconference on October 25. “Sales and prices will decline further in the next few months,” she warned.
As housing prices reach a tipping point, many worry that the government may loosen its policy. Acquiring huge amounts of land grant funds by appropriating land then transferring it to real estate developers, local governments have been the biggest beneficiaries of China’s property boom, and would be happy to see it continue. Even the resolute central government may be concerned that a sudden dive in housing prices could hurt State-owned banks and further hamper GDP growth.
The current impasse is not without precedent. When a similar austerity scheme was launched to control housing purchases in 2008, a drop in real estate prices led to protests in certain areas, which were acquiesced to, if not encouraged, by local governments. Wang Shi, CEO of Vanke, openly criticized local authorities for their inertia when protestors stormed his company’s sales offices. When the global financial crisis struck later the same year, the central government swiftly scrapped the tightened policies, resulting in a renewed rise in house prices.
In the wake of the protest in Pudong, the Shanghai government announced that real estate companies are required to re-register their property with the authorities if the price cut is more than 20 percent. The intervention has been widely interpreted as an effort by the Shanghai government to limit the margin of price reduction. It is estimated that the revenue from land grant fees decreased by 23 percent in Shanghai in 2011 compared with the same period in 2010.
Spooked by falling prices and shrinking revenue, a number of other city governments have also launched minor policies to shore up the real estate market. But with the central government standing firm on housing market regulation, local governments have no power to lift major restrictions, and it is unlikely that minor adjustments could have much impact.
On October 27, Jiang Weixin, head of the Ministry of Housing, sparked speculation that the central government could remove the limits. “It would be unnecessary to continue limiting housing purchases…once all information on the housing situation of each individual is incorporated into the databases of banks and taxation departments,” said Jiang at a meeting of the Standing Committee of the National People’s Congress.
While many have interpreted Jiang’s comments as a prelude to a policy reversal, Premier Wen Jiabao delivered the opposite message with an unequivocal reinforcement on November 6 that it was “staunch” national policy to bring housing prices back to a “reasonable” level.
Some believe that this “reasonable” level is 20 to 30 percent below the current market price, and the central government may loosen its policy in early 2012 when that target is likely to be met. Others however believe that, despite its obvious potential to raise the public’s hackles, the policy will remain in place until the launch of other long-term mechanisms, such as property tax.
Confused by mixed messages from upper-level politicians and with little room to maneuver, speculators, real estate agents and local governments await their next public standoff. With none of the three able to effect any significant change on their own, the future of China’s real estate industry remains squarely on the central government’s doorstep.
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Badeling Pass | Beijing
Sep 2011 | Submitted by Brian Snelson
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