SUN
WUKONG Bulls and bears on China's property
market By Wu Zhong, China
Editor
HONG KONG - Continuous
housing-price hikes in major cities in China over
the past couple of years have split the urban
citizenry into two major groups: those who own
housing and those who don't. The two groups have
utterly different expectations of future market
movement.
Property owners, who have
benefited from the asset inflation, are generally
bullish about the market, saying there is still
much room for housing prices to expand. For
instance, a landlord in Beijing
whose apartments have doubled
in value over the past 20 months, told me this
month he expects hikes in prices to continue for
some years.
"Next year, there will be the
Beijing Olympics. After that there will be the
Shanghai World Expo in 2010. These will boost the
country's economic growth. As long as the economy
grows, so do housing prices," he said.
In
Shenzhen, a veteran real-estate investor who has
several apartments held a similar view. "Look at
the booming economies here and in Hong Kong. As
long as people's income continues to grow, there
is no way for housing prices to go down," he said.
But those who have yet to own property
curse the price hikes, saying housing, a necessity
for everyone, has become unaffordable for many.
They hope the government will take more effective
measures to bring down housing prices.
However, the Chinese government so far
seems reluctant to take harsh administrative
measures to curb the housing-price hikes, such as
setting ceilings on land prices or levying
punitive taxes on the staggering profits of
property developers and speculators.
One
of the many theories to explain the government's
cautious attitude is that it does not want to
anger owners by bursting the property bubble,
which may result in social unrest. In this regard,
the central government may have learned a good
lesson from Hong Kong when it was under chief
executive Tung Chee-hwa.
Soon after he was
sworn in on July 1, 1997, Tung set as his priority
task to bring down housing prices. He launched his
now-notorious policy of building 85,000 apartments
a year and pledged to let 70% of Hong Kong
households own their own apartments in 10 years
(at that time only slightly more than 40%
households owned housing).
Tung's
ambitious policy, exacerbated by the Asian
financial crisis, soon led to a property-market
crash, with housing prices dropping by more than
half in the next few years. Many property owners
suddenly became "negative equity owners" (the
market value of their housing was less than what
they owed the banks). This was one reason Tung
lost the confidence of Hong Kong people so early
in his administration.
On the mainland, a
sudden sharp price drop in property prices could
have worse outcomes. Because of a reform initiated
in the mid-1990s to privatize housing previously
allocated to residents, about 80% of formal city
households, ie, those with a hukou or
formal residency registration, now own their
homes. They would naturally be upset by a sharp
deflation of their assets, particularly if it is
caused by the government.
In this regard,
what Tung has "contributed" to the motherland is
the lesson from his bitter experiment in Hong Kong
that the government should in every way avoid
directly intervening in the housing market with a
brutal "visible hand". Hence the central
government has had to resort to what it calls
macroeconomic control measures, which are
seemingly rather weak in checking the price hikes.
According to a survey by the National
Development and Reform Commission and National
Bureau of Statistics (NBS) released on August 17,
the previous month's housing prices in 70 large
and medium-sized cities rose 7.5% year on year and
1.2% month on month.
Nevertheless,
recently there are also signs that housing prices
in cities may be reaching their peak. The first
sign is that the market becomes increasingly
speculative. In major cities, fewer buyers are
local residents who need a place to dwell and more
are investors or speculators from other places.
In Beijing, one can hear these days that a
rich coal-mine owner from nearby Shanxi province
has bought many apartments in this or that housing
estate. Notorious speculators from Wenzhou,
Zhejiang province, are active in this or that
district. By contrast, locals who need housing
simply cannot afford to buy an apartment.
Even in Guiyang, the capital of Guizhou,
one of the poorest provinces in southwestern
China, one can hear people talk about Guangdong
investors arriving in groups to buy apartments.
Certainly, non-locals do not buy in these cities
actually to live there but to speculate for
profits.
Another sign is that in some
cities, housing sales are slowing down remarkably.
In Beijing, for example, total housing sales
amounted to 2.5 million square meters in the first
seven months of this year, down 39.4% from the
same period a year ago, according to a survey
jointly conducted by the Beijing Municipal Bureau
of Statistics and the NBS's Beijing Survey Team.
Of the total, sales of residential housing
amounted to 1.8 million square meters, a 46.3%
year-on-year decline, and sales of forward
residential housing were down 21.1%.
According to the NBS, developers sped up
housing construction this year spurred on by the
bullish market. In January-July, total area under
construction across the country reached 181.9
million square meters, up 22.5% from a year ago.
However, unsold housing also totaled 121 million
square meters, up 0.5% year on year. This suggests
that, because of time lag, unsold housing could
increase in the second half of this year if the
growth in sales does not catch up with the
increase of construction.
Banks, the
largest lender in property market, are the most
sensitive to any change in the market. Banks
tightening housing-mortgage loans is one more
strong sign that the market hype may come to an
end.
This month, commercial banks in major
cities began to tighten mortgage loans. One reason
is they are worried about the US subprime-mortgage
crisis. To reduce risk, Chinese banks now require
higher down payments for mortgages or impose
stricter credit examination on potential
borrowers.
The Shenzhen branches of some
banks have raised the required down payment from
30% to 40% and put a stop to mortgages on
pre-owned houses. In some cities, banks only grant
a mortgage to qualified people who are buying
their first apartments for their own use.
Another reason for banks to tighten credit
is the government's belt-tightening policy. On
August 15, the central bank raised the deposit
reserve ratio by another 0.5%. This was the sixth
time the central bank has raised the ratio. Now
the ratio is 12%. That means a commercial bank has
to hand in 12% of all deposits it receives to the
central bank as reserves, hence less money is
available for it to lend.
To make matters
worse, many depositors have withdrawn their
savings to invest in the stock market. As many
banks have almost used up their quotas for housing
mortgages, they can hardly lend any more if they
fail to attract new deposits. Hence in cities
these days, one can see bank promotions trying to
lure deposits.
Still another sign is that
many property developers have begun to feel
uncomfortable with housing-price hikes. They are
quietly speeding up their sales, trying to secure
their profits before the market changes direction.
A big property developer in Shenzhen plans to sell
all of its available apartments before the end of
2008.
All these signs suggest that
housing-price hikes in major cities may reach
their peak some time soon - possibly next summer,
around the time of the Beijing Olympics. But
whether afterward the prices soon take a downturn
or remain flat for a while is an issue to be
decided by the market.
(Copyright 2007
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