China's property boom cools, pain spreads
By Olivia Chung
HONG KONG - China Vanke Co and other leading Chinese property developers are
slashing prices to attract customers as government measures to rein in an
overheated market are having their effect.
China Vanke, the country's largest publicly listed developer by market
capitalization, this month cut prices at projects in Shanghai and Shenzhen by
20% compared with earlier sales, according to China Real Estate Information
Corp (CRIC), a data and consulting firm. Rivals such as Longfor Properties, the
largest developer in the central metropolis of Chongqing, and China Overseas
Property, have made similar price cuts.
The central government has enforced higher down-payments, home purchase
restrictions, an introduction of a property tax in
some cities, and boosted construction of low-income housing. The central bank
has raised interest rates three times and the bank reserve ratio six times this
year to tighten lending. The result is falling property prices, reduced
land-sales revenue for local governments, and crimped sales for steel makers
and construction machinery producers.
Shenzhen-based China Vanke's contracted sales tumbled 33% by value in October
compared with a year earlier to 10.34 billion yuan (US$1.6 billion). Closest
competitor Poly Real Estate Group Co reported a 39% drop to 5.42 billion yuan
for the same period. Sales by Gemdale Corp, the fourth-largest listed developer
and also based in Shenzhen, fell 29.4% to 2.67 billion yuan.
New home prices, excluding those of government-funded affordable housing, fell
in October from the previous month in 34 out of 70 major cities, with gains in
16 cities and no change recorded in the remainder, according to the National
Bureau of Statistics. Cities showing month-on-month declines were double the 17
recorded in September, when prices rose in 24 cities and were unchanged in 29.
In the country's four major cities - Bejing, financial center Shanghai, and the
industrial hubs of Guangzhou and Shenzhen, near Hong Kong - new home prices
fell in October by between 0.1% and 0.3% from a month earlier after remaining
unchanged for three months.
In an extreme case, home prices in Kangbashi New Area, a district in wealthy
Ordos, Inner Mongolia, have tumbled by nearly 70% to 3,000 yuan a square meter
this year, Ce.cn, a government-owned economic news website, reported on
November 25. Ordos has been dubbed "China's Dubai", its wealth built on vast
deposits of coal that account for one-sixth of the nation's total reserves, and
one-third of China's gas reserves.
While the heat appears to have been taken out of the property market,
government tightening policies are impacting other parts of the economy, such
as steel and machinery makers. Housing construction accounts for about 20% of
the country's steel consumption, according to Mysteel Research Institute, the
nation's biggest steel research firm.
The nation's demand for cranes and excavators will slow next year, according to
Changsha Zoomlion Heavy Industry Science & Technology. The Hong Kong- and
Shanghai-listed company is China's second-biggest maker of construction
equipment. Its Hong Kong shares have halved in value to around HK$7.80 from
above HK$17 in April this year.
Excavator sales in China tumbled 27% in October from the previous month, the
sixth consecutive monthly decline. Cumulative sales volume to October were up
only 16% year-on-year after surging 78% in the 12 months to last December.
Leading steel makers Baoshan Iron & Steel Co, Wuhan Iron & Steel Co and
Anshan Iron & Steel Group, this month said they would lower prices for next
month's contracts amid slowing demand from real-estate builders.
The China-listed shares of Baoshan and Wuhan are down about 30% since April,
while Angang Steel, the publicly traded unit of Anshan, is down around 39%.
First-half earnings at Angang Steel crashed 91%, hit also by falling demand
from automakers.
With property sales falling, developers are buying less land from local
governments, which rely on land sales for around 70% of their revenue.
The ratio of land acquisition expense to property revenue for leading
developers is now as low as 21%, according to a report of Centaline Property
Agency, down from 99% in 2007, when it started compiling the data. The ratio is
down from 47% in 2010 and 61% in 2009.
In October, only two of the 10 major developers tracked by Centaline bought
sites - China Vanke spent 2 billion yuan for three sites and Hangzhou-based
Greentown bought a site for 98 million yuan. Before last month, leading
developers were buying sites every month, Centaline said.
Some local governments, such as Guangzhou, the provincial capital of Guangdong,
are now scrapping such sales rather than lower their selling prices. Guangzhou
has called off the sale of more than 30 development sites in the past two
weeks.
Others, including Shanghai, Chengdu (capital of Sichuan province), Jinan
(capital of Shandong province), and Hangzhou (capital Zhejiang province), have
either scrapped land sales or sold land lots at minimum prices.
Because of the government's tightening measures, property prices will fall by
10% to 30% in the coming year, according to a report by Huang Yiping at
Barclays Capital on November 8. That would shave 0.5 to 1 percentage point off
the country's economic growth next year, the report said. It forecasts 8.4%
economic growth next year, down from an estimated 9.4% this year.
Premier Wen Jiabao on November 6 reiterated that the government will not ease
tightening measures until home prices have returned to a "reasonable level" -
the third time in a month he had expressed the government’s determination to
continue with its efforts to cool the market.
Even so, the government is likely to adjust or even reverse policy restrictions
if home prices drop by 20%, Huang said.
A decline on that scale would force regional governments to change their
policies, Liu Yuanchun, associate dean of the School of Economics at Renmin
University of China in Beijing, said in a report.
"Provincial governments, which have relied on land sales for investments in
infrastructure, could not withstand a 20% housing price drop," said Liu.
"Policy makers might gradually loosen restrictions on mortgage loans in the
third quarter next year, but before an overall relaxation in purchase
restrictions, regional governments are likely to ease the restrictions quietly
in the second quarter."
Liu forecast 9.2% GDP growth for 2012. "Economic growth will slow in the first
half next year, but it will pick up in the third quarter due to significant
adjustment in macroeconomic policies," Liu said.
Some local governments, including Chengdu, have already tried to relax market
conditions. On November 11, the city government eased purchase limits by
allowing developers and property agents, rather than the government, to check
the eligibility of home buyers. Foshan, near Guangzhou, last month said it
would allow individuals to buy a second flat as long as it was priced below
7,500 yuan per square meter.
Both cities, however, quickly reverted to the original rules - on orders from
Beijing, according to mainland reports.
In curbing the property market, the central government is treading a wary line
between cooling the economy and risking unrest as existing homeowners see the
value of their property assets decline and new buyers snap up similar
properties at considerably lower prices.
"If the property prices in Beijing, Shanghai and Guangzhou drop by 10%, the
social problems incurred will be bigger than those triggered by a 30% hike in
the property prices," said Li Daokui, economist and adviser to the Monetary
Policy Commission from People's Bank of China.
In October, hundreds of angry homebuyers besieged sales offices at three
Shanghai residential projects, seeking refunds or cancellations after learning
that developers had slashed prices by 20% to 30%.
The government should continue with its tightening measures, according to Yi
Xianrong, a researcher with the Institute of Finance and Banking under the
Chinese Academy of Social Sciences.
"House prices have increased by about 10-fold in the past decade in cities like
Shanghai and Beijing. How come the property market cannot withstand a 30%
housing price drop now?" Yi asked.
The government's continuing tightening efforts will also help to reduce local
government reliance on income from land sales, he said. "Investing in real
estate becomes so profitable that entrepreneurs and other people indulge in
speculation rather than manufacturing."
Meanwhile, early localized victims of poor property sales are real estate
agencies - 177 closed in Beijing alone last month, according to Home Link
China, one of the country's biggest. Centaline, one of the most popular
property agencies in Shenzhen, said this month it would close 60 outlets and
about 1,000 employees would be laid off in the city. About 3,000 property
agency outlets have collapsed in Shenzhen this year, bringing the total number
down to around 5,000.
Olivia Chung is a senior Asia Times Online reporter.
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