Property market in China continues to decline

After a couple of years of buoyant growth, the housing market in China is declining partly for the same reasons affecting property markets elsewhere in the world and partly for internal reasons. Chinese media in recent days hasa been carry ingnews or feature stories daily about house prices falling and cooling down of the property market. One of the fast-growing areas in China is Shanghai, where property prices and rents have been rising in the past two years.

The sale of new flats in Shanghai, measured by floor area, plunged almost 50 percent in the first half this year and analysts suggest the market was unlikely to turn around until September – traditionally the peak season for property sales there. Latest figures released by mainland research institute (Youwin) show 5.27 million sqm of new residential area was sold in the city between January and June, compared with 10.43m sqm in the same period last year.

According to Youwin, because of the slump average residential prices fell 4.3 per cent for the week to June 29. The trend is all over China, and investors had withdrawn from the market as banks are charging higher interest rates and requiring higher initial deposits for buyers of second homes.

Property prices more than doubled in the main Chinese cities recently, and with inflation spiralling in the country the government had to take drastic measures to adjust the macro-economic indicators to avoid over-boiling of the economy.

The US sub-prime crisis and global credit crunch had little effect on Chinese property sector, and recent trends are mainly attributed to new official regulations.

Chinese economic policymakers became worried about the whole economy and damage to its sustained growth, so by late last year the central government made controlling the rise of asset prices a policy priority. Since then, the State Council has rolled out a series of regulations, as a credit ceilings to a 40-per cent down-payment requirement for second mortgages to combat property speculation.

The impact of such measures was quick to be felt, especially in southern China where property sector was more booming. Prospects for other key markets are not good either, as with China continuing to struggle with high inflation, the central bank is likely to keep tight reins on monetary policy. Indeed, early last month it increased commercial banks' reserve-requirement ratio by one per cent, in effect taking out more than 400bn Renminbi – $58bn – from the financial system.

Property investors around the country are now holding their breath to see whether markets are going to recover or will keep diving. Many developers are postponing putting their new units on sale until September to avoid a price crash due a glut in supply and declining demand. However, demand is not showing any sign of health and analysts are expecting it to be under downward pressure for a while.

Now, that would be a bad news for developers and builders who speculated heavily in the sector on assumption that the boom will continue. Chinese economists and analysts expect 35 per cent of the country's developers to go bankrupt in the next two years, if current trend continues. The other factor affecting the property market in China is the flow of investors' money into the sector. Despite the official tightening of lending to property speculators to cool the market, developers colluded with banks to find a way round it.

Moreover, some developers are turning to overseas investors. Foreign hedge funds are eager to lend to Chinese property companies. Not only can they charge 25 per cent or more in annual interest rates, foreign lenders can also expect to benefit from the continued appreciation of the Rmb in the coming months.

Again, this is a short-term trend, and foreign funds are highly sensitive to regulations, so they can flee the market in days causing turmoil. General outlook for Chinese property market looks bleak, at least for the short-term. Any recovery in the sector would rely on the rising demand, which the central government is keen to curb so far.