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    China Business
     Jan 7, 2006
Housing boom turning to bust?

BEIJING - Yan Lei, a young banker, toured the tree-lined gardens, sculptures and fountains of Baoland East Garden, a new Shanghai apartment complex, but he did not buy, deciding instead to hold out for lower prices. "Home prices in Shanghai have begun to fall, so why hurry to buy now?" said Yan, 30.

He was not willing to spend the 1.96 million yuan (US$242,800) the developer was asking for a 140-square-meter unit. Yan thought less than two-thirds of that would be enough. "The environment is ideal; the prices aren't," he said.

China's most expensive property market has been deflating since June, when new taxes aimed at speculators halted a six-year

boom during which prices had almost tripled. The slide may deepen as developers increase supply and demand wanes in a city where a typical new apartment costs more than 50 times the average annual income.

"Property prices in Shanghai have risen out of the reach of ordinary citizens," said Qiu Zhicheng, an analyst at Xiangcai Securities Co, who forecast prices will drop 10% in the coming year. "It was only a matter of time until prices fell."

Real estate has helped Shanghai's economy expand by 12% annually since 1990. The city of 17 million people has built more skyscrapers in those 15 years than there are in New York. China's central bank described the city's second-hand and luxury-home markets as "bubbles" in a report issued in August.

'Selling spree'
Home prices dropped by 7.9% between June and October, according to the city government's Shanghai Home Index, which has not reported a more recent figure. The index more than doubled between December 1999 and May 2005.

The steepest declines since then have come at new apartment projects, as developers such as China Vanke Co, Shanghai Shimao Co and Shanghai Industrial Development Co try to raise cash to meet year-end bills and finance new developments. "Developers need to pay construction contractors at the year-end and balance their books," said Chen Sheng, vice director of the Shanghai Real Estate Index Office. "That's triggered a selling spree."

The amount of new apartment space on sale in Shanghai jumped to 9.66 million square meters in mid-December, almost three times the 3.59 million square meters on the market at the end of 2004, according to city government figures. Home sales this year reached 26.8 million square meters by mid-December, about two-thirds of the 34.9 million square meters sold in 2004.

"We had to cut prices in order to sell the remaining stock," said Qian Zheng, sales manager at Baoland East Garden, which is asking an average of 9,300 yuan per square meter, down from 13,000 yuan at the peak last year. "We need the cash for the development of another project."

Shimao Riviera Garden, a high-end project in the city's Lujiazui financial district, reduced asking prices to 26,000 yuan per square meter from a peak of 36,000 yuan in March. Vanke, the nation's biggest publicly traded developer, cut prices for its developments in Shanghai by as much as 20% in September to spur sales, according to board secretary Xiao Li.

Slowing demand has prompted some developers to offer perks such as free plane tickets and air conditioners, while others are guaranteeing refunds in the event of further price declines, a tactic used by Hong Kong developers after 1997, when the city's real-estate prices slumped by 60%.

Bags of cash
The current buyers' market is quite a turnaround from the pre-June boom, when would-be buyers sometimes had to wait in line for days to register for popular developments, and local newspapers were peppered with stories about rich entrepreneurs from Wenzhou and other cities arriving with bags of cash to invest in real estate. "I brought a chair with me and sat all night," said Ding Ou, 30, who bought a home in the city center in 2002. "The market was crazy, and it got much crazier afterwards."

Darkened windows became a common feature of the nighttime cityscape, as developers and speculators stockpiled vacant apartments in anticipation of further price increases. Prices jumped 19% in the first quarter of 2005 from a year earlier, prompting central bank governor Zhou Xiaochuan to say Shanghai's home prices were worthy of "concern and attention".

The central bank in March raised the minimum interest rate lenders must charge on home loans and encouraged them to demand bigger down payments. After those measures failed to dampen price gains, the central government ordered local authorities to apply a 5.5% tax on the sales price starting in June. In March, the State Council said that rising property prices were threatening financial and social stability in China, in a six-page circular that ordered local governments to take steps to curb "excessive" growth.

In Shanghai, a new 100-square-meter apartment costs an average of 914,000 yuan, according to the Shanghai Real Estate Exchange. That's 55 times last year's average disposable income of 16,683 yuan. The comparable ratio for the UK is 5.5, according to HBOS Plc, the nation's biggest mortgage lender.

(Asia Pulse/XIC)

Real estate market to recover soon
(Sep 20, '05)

Red-hot Shanghai property market cooled (Jun 4, '05)

Growth cools in Yangtze River region (Jun 2, '05)

Foreign money pours into Shanghai (May 19, '05)

Regulation needed
(May 17, '05)


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