August 30 , 2011
Beijing has been stepping up the pressure on both the supply and demand side of China’s housing market. 2011 has seen an increase in interest rates, property taxes, down payment ratios, and restrictions on multiple home ownership introduced to curb the rapid price rises in tier one cities. The results may be showing.
This article in Business China has quoted a couple of the major league developers saying that they are putting the breaks on expansion. “Developers are all trying to reduce as much housing inventory as possible,” according to a senior manager at Vanke. In this article for the China Daily, Poly Real Estate “said the possibility of "a localized price volatility" in the second half of the year cannot be ruled out because of the Chinese government's efforts to curb housing price surges, increasing supplies and a continuous capital crunch plagued the real estate sector.”
Poly also blamed the debt crisis in Europe and the US for falling transaction volumes, but the mechanics are much simpler and much closer to home.
Firstly, China’s M2 has increased by RMB 25 trillion between 2008 and 2010 (that’s roughly the same as all economic activity in China in 2007). Coupled with this has been actual GDP over the same period 100 trillion RMB, which consists of consumption, investment and exports. Over a very short period of time, China has become absolutely flooded with liquidity.
Secondly, capital controls have limited people to make investments in limited areas: very little has been allowed overseas; given high transaction costs and state ownership, private investment has been stymied; the hukou system has kept money from a more even geophysical spread; and the stock market isn’t trusted. The average Chinese saver is forced to choose between the stock market, speculative commodities like gold, the banks and property.
Thirdly, interest rates are overtaking price levels. It now costs something like 7.5-8% a year to borrow money to buy a house, up from 5-6% a couple of years ago. Prices have doubled in the last five years and advanced by 10% or 12% in that last 12 months. But these are now falling below interest rates, disrupting an important trend. Property had been used as a bank account of sorts and now that prices are slowing, people are facing negative performance of their “deposits”.
Anecdotally, real estate agent activity is the quietest it’s been since late 2008. Very few units are being sold and, judging by comments from developers, less is coming on the market.
So what happens?
It’s important to note that this isn’t a bubble. There isn’t going to be a mass sell-off. Why? There is a long-term-hold mentality towards property in China. This isn’t the borrow, buy and flip type of activity we saw abroad prior to 2007.
There will be some distressed projects and these will probably sit idle for a few years (I remember half finished tower blocks strewn around Asia in the wake of the 1997 AFC. It took up to 5 years for the ownership to be unraveled and acquired). There will be few individual defaults as mortgage periods are short (typically 5 years) in China, with high down-payments and lots of family help.
Expect more of a lock up in the market, which will be felt in Beijing and Shanghai, and less so in the so-called lower tiers of China. Mr China makes an interesting point about greenfield investment opportunities for foreigners.
Over the longer term, growth will remain robust. The government has several control rods in the market, and can remove any of these to spur growth. But for the time being, there is likely to be a capital flight from property and back into equities, gold and the banking system.
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GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.