China's Hot Housing Market Cools - But Has the Bubble Burst? - WORLD PROPERTY CHANNEL Global News Center

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UPDATE: China's Hot Housing Market Cools - But Has the Bubble Burst?

Posted by Alex Finkelstein 06/09/10 8:00 AM EST
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Sales Down 40% in 24 Major Cities.
Booming Property Market Paralyzed, Some Analysts Speculate.
Cool-down Could Last Several Months, Industry Watchers Predict.
Government's New Regulations Crimping Sales, Marketers Say.
China's Economy to Grow at 9.5% Rate Instead of Previously Forecast 10.5% Pace, Some Economists Estimate.
Real Estate Industry Consultants and Developers Watching to See What Beijing Will Do Next.
Buyers and Sellers in a Hold Pattern, Awaiting New Government Moves.
Shanghai and Chongquing Fear New Government Realty Taxes Coming.
Higher Taxes Will Push Down Value of Properties, Analysts Note.
Larger Down Payments and Restrictions on Buying Multiple Properties Now in Effect.
Uncertainty is Running Through the Entire Real Estate Market in China, Warn Consultants.

Housing sales in numerous Chinese cities are down 40 percent from where they were six months ago, according to a new analysis by Soufun.com, an 11-year-old, Beijing-based real estate consulting firm considered to be the country's premier industry watcher.

Soufun.com covers 100 cities throughout China, according to its web site.

The Wall Street Journal used Soufun.com's latest data to show that economic planners in China may have gone too far in trying to avoid a real estate bubble crash.

The WSJ states government policy changes have thrown China's booming property market into a period of paralysis that some industry executives say will last for several months.

A rebound in China's property market has been central to the nation's rapid recovery from the financial crisis, but surging housing prices had led to increasingly open discontent from middle-class families in major cities, the WSJ reports.

After months of indecision, Beijing in mid-April announced a package of policies intended to blow the froth out of the market by restricting speculative purchases.

"Officials may have gotten more than they bargained for," the WSJ reports.

Though still too recent for their effect to show up in official economic statistics, early indications are that the new measures have sharply cooled the property market.

Arriving around the same time as the debt crisis in Greece, China's new restrictions caused many investors and businesses to question the strength of the global recovery.

Domestic steel prices are down 7.4% since the April measures, and China's main stock market index is down 19.4%.

The housing market in many--though not all--Chinese cities seems to have nearly ground to a halt after the government moves, the WSJ reports.

Pudong District, Shanghai

On average, the number of residential property transactions in the four weeks after the restrictions were announced is down 40% compared with the four weeks before the measures, according to figures covering 24 major cities from real-estate consultancy Soufun.com.

China's economic growth was already widely expected to slow in coming months, as the impact of last year's stimulus policies fade, according to the WSJ.

Some forecasters, seeing weaker prospects in a key industry, are now further marking down their numbers for this year.

China International Capital Corp. now expects the economy to expand 9.5% in 2010 as a whole, rather than the 10.5% it previously forecast.

But the key variable for how things unfold in coming months is difficult to forecast: What the government will do next.

Analysts are divided about whether the government is more likely to take additional measures to push down prices, or start to reverse itself to restore confidence in the market.

Investors are focused on whether the government will impose new taxes on residential property, a move that is being discussed by big cities including Shanghai and Chongqing.

China's State Council has signaled support for such changes, approving a set of economic-reform priorities including "gradually advancing reform of real-estate taxation."

Even though no specific plans have been announced, the issue is weighing on markets since higher taxes would push down the value of properties, according to the WSJ.

Li-Gang Liu

"The government has been very ambiguous about the property market," said Li-Gang Liu, China economist for Australia & New Zealand Banking Group.

Officials are afraid both of letting a bubble get out of hand, and of cracking down too hard and endangering growth, as happened in early 2008, he said.

The prospect that the rules of the real-estate market may be rewritten have created uncertainties for both buyers and sellers, who are trying to figure out what the government's new attitude means for the market.

The April rules raised down payment requirements and restricted purchases of multiple homes, and were supplemented by other measures that differ from city to city.

"Yet the subsequent slowdown seems to be greater than can be explained by the number of people directly affected by the changed rules," the WSJ reports.

"What's really dampened the market is the uncertainty. That overhang is what's driving everyone to wait," Kevin Yung, executive vice president of IFM Investments Ltd. told the WSJ.

Kevin Yung

Yung's company runs the Century 21 real-estate agency franchise in China. "We think this could last another three to six months," he said, a rough forecast shared by other industry executives.

Yung tells the WSJ his business is seeing plenty of traffic: People are still looking at apartments and asking about prices.

But many are holding off final decisions, and will likely need prices to come down before they take the plunge into home-ownership.

"We think prices are going to come down, probably by about 20%, but it will happen over time because this adjustment is driven more by policy than demand," he said.

Quincy Zhao, who works at a consulting firm in Shanghai, is waiting to see if the government's measures really will make a dent in the city's steep prices, she told the WSJ.

Ms. Zhao, 26, now rents an apartment with three friends, but has her eye on a place of her own in the Pudong district that would at current prices cost her 3 million yuan, or about $440,000.

"I have to be super-cautious given that the situation is not so clear at the moment. I am afraid that getting into the market now will lead to a loss if the property price really goes down," Ms. Zhao said. "Personally, I do hope that these policies will work."

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