China should handle property market carefully

Graham Norwood

What is happening to the property markets in China?

A few weeks ago, I wrote that the Beijing authorities were taking measures to avoid its commercial and residential markets being perceived by outsiders as speculative bubbles ready to burst. These measures are coming in now, but are they enough?

The latest figures from the authorities' official property website – www.stats.gov.cn – are alarming because they are so unsustainable.

Average prices in 70 cities rose by 12.8 per cent in the year to April, the fastest pace since official figures began five years ago. Prices rose 1.4 per cent in April alone – the 11th month in a row to see an increase. Meanwhile, transaction levels in the first four months of 2010 alone were a whopping 36.2 per cent compared with the same period of 2009.

If you look at specific 'time windows' in Spain, Ireland, the UK, the US or indeed the UAE at different points over the past decade, you will see far more worrying figures. But that is to miss the Chinese way of looking at things. Beijing tends to consider property markets not in isolation but by looking at the country's, and the world's, wider economic context and its global perception.

Right now, China's economists are worried about the effects of an ever-weakening euro and the prospect of a sharply narrowing trade surplus this year. Consumer prices rose 2.8 per cent in the 12 months to April, exceeding forecasts and reaching the highest level since October 2008. GDP growth levels, still running at an enviable annualised level of nearly 12 per cent, are thought to have peaked – a source of national embarrassment for a country that believes growth should continue rising, even if those figures would be a blessed relief for most other nations of the world.

Against that background, therefore, the prospect of a property bubble bursting due to speculative pressures is a major worry for the authorities, who are alarmed by the current figures – no matter how acceptable they look to other countries. Measures are being introduced as a result, across both commercial and residential sectors.

Developers are no longer permitted to receive deposits for unfinished properties unless they have obtained government approval for off-plan selling. Developers must also publish prices of each unit sold within 10 days of receiving approval for off-plan disposal, in a bid to prevent developers 'hoarding' property illegally to push up prices.

The measures also create what is effectively a credit crunch on individual property purchasers. Banks should 'noticeably' raise deposits for homes and mortgage rates for investors buying a third or subsequent property should pay significantly higher interest rates. In cities where house prices are rising quickly – almost every major city, therefore – banks may refuse mortgages to 'serial buyers' or anyone who cannot prove residence in that city.

The Chinese property industry is now beginning to respond.

The South China Morning Post reports that some cities have seen property prices drop 19 per cent in recent weeks, with developers slashing prices. The Evergrande Real Estate Group last week discounted prices by 15 per cent for a limited period on 40 developments in 20 cities. Some other developers, staging more selective cuts, have slashed asking prices by up to 19 per cent.

Yet, there is speculation in the Chinese media that more credit, planning and purchasing restrictions are on their way. The reason? Well, the Chinese authorities are beginning to see structural problems in its reliance on real estate, that require long-term changes in culture as well as short-term tweaks. Analysts say that property investment has accounted for over 10 per cent of Chinese GDP over much of the past decade – double that of the US – creating jobs and a feel-good factor that are now at risk. Some 70 per cent of property construction has been funded from bank loans, while developers and local governments across China have fuelled price rises of buildings by purchasing and hoarding land.

There still remains many differences between China and the rest of the property world, and I do not just mean its political philosophy.

The nation has a vast reserve of US dollars in addition to its uniquely large population, high levels of consumption, unmatched manufacturing capacity and still-untapped mineral wealth. All may help the country lessen the impact of a property market collapse – or even stop it collapsing at all.

Even if there is a problem in China in the coming months and years, my bet remains – as it has done for several years now – that China will be the 'big winner' as power in the real estate world moves from established nations to emerging ones.

But it will be a rocky road that China travels before it encounters on its way. It is in our interests that it takes measures now to make that path a little smoother.

 

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