China Real Estate Market Faces Slump

Residential housing prices are expected to fall in China just one year after the nation saw the highest price rises in the world in that category. And Beijing …

Residential housing prices are expected to fall in China just one year after the nation saw the highest price rises in the world in that category. And Beijing in particular faces an oversupply of housing, much of it built for the 2008 Olympic Games. For more on this, read the following article from Global Property Guide:

In 2007 China experienced the highest rise in residential property price in the world, with prices in major cities doubling over the past few years.

The first half of 2008 however saw a marked slowdown. The house price index for 70 major cities rose 7% in July 2008 from a year earlier, the lowest increase yet this year, according to official government statistics. When adjusted for inflation, house prices rose by a mere 0.7% over the same period. Some developers retained their list prices but offer rebates of up to 10%.

Real estate chains have been closing outlets in cities such as Shenzhen, Guangzhou, Beijing and Shanghai, according to news reports. Transactions are significantly down.

Since no official city-level price index exists, different real estate agencies provide varying estimates of price falls. Shanghai Uwin Real Estate Information Services Co. cites the biggest price falls, the average transaction price of new commodity housing in Shanghai fell 24.5% from CNY16,988 (US$2,488) in June to CNY12,824 (US$1,878) per square metre in July 2008.

Price falls are expected to be around 10% to 30% in several major cities, as lending dries up while the economy cools. The restrictions on lending are part of the government’s anti-speculative measures intended to cool down the housing market.

Shanghai’s second-hand market

While prices of new houses in Shanghai are falling, second hand homes are more resilient. The second-hand housing price index rose 31.65% (23.85% in real terms) y-o-y to July 2008, according to ehomeday, Shanghai’s largest housing information portal.

However, there were also signs of strain. The monthly change in the price index has been declining since the start of 2008 down to 0.38% in July. House price falls were also observed in several Shanghai districts. When adjusted for inflation, the index actually fell 0.2% from the previous month.

The number of transactions also fell 20% in July from the previous month.

Rents in the luxury segment have been flat for four years, while prices have risen strongly over the past two years. Strong per capital income growth and the growing number of expatriates are pushing demand.

However the vacancy rate of luxury residential properties is high, at 17.5% in Q4 2007, according to Colliers International. Investors appear to be increasingly choosing to hold and rent out their properties rather than selling.

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Post-Olympic slump threatens Beijing

The 2008 Beijing Summer Olympics was very successful despite minor protests and scandals about computer-generated fireworks and lip-synching.

Almost everybody made sacrifices to ensure the success of the games. Thousands of households were relocated to make way for the new sports facilities. Small businesses were closed during the games because they were deemed eyesores. Large-scale constriction within and around Beijing were put on hold. Factories, particularly those producing steel and cement, were closed while traffic was cut in half to improve the city’s pollution level. Strict visa screening to deter protesters and activists led to fewer tourists than expected, and several hotels had high vacancy rates during the games.

Although the city will benefit from an improved mass transportation system, it also has to deal with the overcapacity that accompanies it. The Olympic Village alone added thousands of new apartments, as much as 80% had been sold even before the games started. The Water Cube will be converted into a water-styled theme park.

Both prices and rents in the luxury apartment sector have moved up only somewhat over the past 4 years in Beijing. The overall average vacancy of luxury apartment stood at 20.67% at end-2007, according to Colliers. The vacancy rate of high-end apartments was 10.5% at the end of 2007, up marginally from the end of 2006, according to Savills.

Anti-speculative measures

China has experienced a massive construction boom during the past decade. Huge housing complexes with hundreds of thousands of new units have sprouted in or near major cities, intended for the rapidly rising middle class.

Adding to the boom, the entry of foreign developers from Singapore, Hong Kong, Taiwan, US and Europe has greatly increased housing supply. Because of this, the Chinese authorities have worried that an oversupply would lead to a crisis similar to the Asian Crisis in Hong Kong, Singapore and Indonesia.

Three years ago, the authorities had introduced anti-speculation measures, including a limitation on foreign ownership of investment properties. Generally, only foreigners who have worked or studied in China for at least a year are allowed to buy a home.

The government has adopted many measures to slow the boom, including the introduction of a property business tax and stricter control over land supply. If property is held for less than two years, sellers have to pay a 5% business tax on the total transaction price. If held for more than two years, the seller has to pay a tax on the capital gains only, typically 5%. The deed tax has also been raised from 1.5% to 3%. And a seller must pay off his entire mortgage, before he sells his property.

Property ownership for investment by foreign companies and individuals was effectively prohibited. Exempted from these restrictions are Chinese living overseas and residents of Hong Kong and Macau.

In addition, foreign individuals cannot be landlords. Foreigners can rent out real estate through a company, a process which involves more procedures, closer scrutiny and higher taxes.

In Q4 2007, the government further restricted housing loans for second house purchases. Down payment must now be at least 40%, and the loan interest rate cannot be less than 1.1 times the People’s Bank of China benchmark rate.

Rising inflation woes

China has a rising inflation problem. Inflation in 2007 was 4.8%, the highest rate since 1996 and significantly up from 1.5% in 2006. In February 2008, Chinese consumer prices rose 8.7% y-o-y, the highest rate in nearly 12 years, according to the National Bureau of Statistics.

Although inflation eased to 6.3% in July, this was still above the 4.8% target that government has set for the year. Food prices, which rose by 14.4% y-o-y in July 2008, are particularly worrying. In Feb 2008, the cost of food was up 21% from the same month last year.

In response to rising inflation, China’s Central Bank raised the bank reserve ratio to a record 17.5% in June 2008 in a fresh effort to curb lending and decrease money supply. The reserve ratio has been hiked 5 times in 2008.

The Chinese economy has been roaring for more than two decades. From 2003 to 2006, the economy grew by more than 10% annually. GDP growth in 2007 was 11.4%, the fastest rate since 1994. The mean annual wage for a typical urban Chinese employee grew 18.72% in 2007, to 24,932 Yuan ($3,556.63) – the fastest growth in six years.

With rising inflation, the economy is poised to slow this year to around 9.2% GDP growth.

Currency movements

Indirect controls such as changes in the reserve ratio are necessary because China’s foreign-exchange reserves surged to $1.68 trillion at the end of March 2008. Currency holdings expanded 40% from a year earlier, according to data from the People’s Bank of China, to a record $153.9 billion at end December 2007. This level of currency inflows is inevitably inflationary.

China has held off from raising interest rates this year, after six increases last year, while the U.S. Federal Reserve has cut rates. The authorities may fear that an increase in yield differentials would attract even more liquidity into China.

The Chinese are in a similar situation to the Taiwanese two decades ago. They too, had a massive current account surplus and a massive stock market and real estate boom. They too, also attempted for long to delay the rise in the New Taiwan dollar, leading to further inflationary inflows of cash. Either the currency is allowed to rise significantly, or the upward pressure on prices will continue.

Although the authorities have allowed some currency appreciation, it has not been enough. The Yuan was pegged to the US dollar at CNY8.27 = US$1 until July 2005. In July 2008, the exchange rate was around CNY6.85 per US dollar, the highest level ever.

This article and its accompanying graphs have been reposted from Global Property Guide. You can view the article on Global Property Guide’s international residential real estate website here


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