A Turning Point in Sight

　　China’s red-hot housing market undergoes correction

　　Pan Shiyi， a real estate tycoon， said at the China Entrepreneurs Forum held in Beijing on May 23 that China’s residential housing market would hit the iceberg very soon.

　　“After the collision， risks in the property market will result in more serious risks in the financial sector，” Pan said.

　　Pan may be exaggerating， but risks in the housing market are real.

　　Following a strong performance in 2013， China’s real estate market has shown signs of cooling down. Prices have been dropping， sales have slowed， new construction has dropped off sharply and banks have become increasingly cautious about lending to developers and home buyers.

　　In Beijing， the barometer of China’s overall property market， home sales declined by almost half to a nine-year low in the first half of 2014. There were 22，782 new homes sold in Beijing in the first six months (as of June 26)， a slump of 48.7 percent over the same period last year， according to data from property agency Centaline Group.

　　In May， 35 out of a statistical pool of 70 major cities saw month-on-month drops in new home prices. Only 15 cities saw month-on-month increases， according to data from the National Bureau of Statistics (NBS).

　　Average prices in the country’s 100 biggest cities fell 0.5 percent in June from May， the second consecutive monthly drop this year， according to the China Index Academy Ltd.， a Beijing-based research institute wholly owned by SouFun Holdings Ltd. In May， average prices edged down 0.32 percent from April.

　　In the first five months of 2014， real estate investment， which affects more than 40 other sectors from cement to furniture， rose 14.7 percent year on year， down from the 16.4 percent in the first four months and 20.6 percent in the same period of last year. Newly started property construction fell 18.6 percent year on year， the fourth consecutive period of decline. Property sales dropped 7.8 percent year on year in terms of floor space and fell 8.5 percent in terms of value， according to data from the NBS.

　　“The risk of a more persistent and sharper downturn in the property sector is now the biggest threat facing China’s economy in 2014 and 2015，” Wang Tao， an economist at UBS Bank， said in a research note.

　　Analysts say that the real estate sector， which accounts for more than 15 percent of China’s GDP， could determine the severity of the economic downturn.

　　However， evidence of a housing market crash remains thin， partly owing to the ongoing urbanization drive and faster-than-ever wage increase. Analysts think this round of real estate market adjustment may signal a change in growth drivers for the world’s second largest economy.

　　Local bailout

　　Several factors have contributed to the recent price fall.

　　“High inventories in some cities and promotions recently undertaken by some developers， together with unclear market expectations that kept buyers staying on the sidelines， have led to prices falling，” said Liu Jianwei， a senior statistician at the NBS.

　　NBS data showed China had 352.8 million square meters of unsold homes at the end of May， over three times last year’s average monthly sales.

　　Owing to a stock market that has been bearish for some time， many Chinese believe the best way to keep their money from depreciating is to buy property.

　　China’s vacancy rates were around 22.4 percent， suggesting a considerable overhang of inventory， according to the China Household Finance Survey carried out by Southwestern University of Finance and Economics.

　　In Hohhot， capital of north China’s Inner Mongolia Autonomous Region， housing stock is close to 120，000 units， while monthly sales are running at about 1，000， according to data from Centaline.

　　At the end of June， Hohhot became the first city in China to put an end to restrictions on home purchases. Centaline estimated that more than 30 cities may follow suit within this year.

　　Some cities have taken a different track by offering easier access to local hukou—permanent residential permits—to boost sales， such as Wuhan， capital of central China’s Hubei Province； Haikou， capital of south China’s coastal Hainan Province； and Wuxi， in east China’s Jiangsu Province.

　　In Hangzhou， capital of east China’s Zhejiang Province， where home prices fell the most in May among the 70 major cities monitored by the NBS， several property developers have given homebuyers an option to sell back their apartment in several years for prices above the purchase price， in order to lift lackluster sales.

　　In Guangzhou， capital of south China’s Guangdong Province， almost 20 housing developments have rolled out no-down-payment plans to boost sales， according to a report from Nanfang Daily.

　　The Central Government has made tacit acknowledgement of the lifting of property curbs by local governments.

　　Jiang Weixin， former Minister of Housing and Urban-Rural Development， said earlier this year that the ministry will emphasize “differentiated control.” When striving to increase the residential land supply in cities that are facing great upward price pressure—a reference to first-tier cities such as Beijing and Shanghai—it will also give local governments a bigger role in their real estate policies， based on local conditions.

　　New round of adjustment

　　Feng Jun， chief economist of the Ministry of Housing and Urban-Rural Development， said the slowdown that the market is experiencing represents normal adjustment. Feng attributed the year-on-year fall in new projects and sales numbers to large bases in 2013.

　　China’s real estate market had previously experienced two rounds of adjustments， one from the end of 2008 to the beginning of 2009， and the second from the end of 2011 to the beginning of 2012， respectively.

　　China’s property market downturn this time will be more prolonged than the last two corrections， said Tom Byrne， a senior vice president at Moody’s Investors Service.

　　Grant Ji， Senior Director of the Investment Department at Savills Plc. in Beijing， said this round of market correction has been triggered mainly by credit tightening. He said that if mortgage and credit policies remain the same， it is hardly foreseeable that the market will be able to make a strong recovery.

　　Concerned about a sharp downturn in the property sector， the central bank recently ordered commercial banks to quicken mortgage lending.

　　Chu Jianfang， chief economist at CITIC Securities， said this latest round of property adjustment will be a long-term one.

　　“After this round of price adjustment， the function of real estate in the broader economy will be changed. By lifting purchase curbs， pushing forward urbanization and regional economic integration， the price fall can be eased，” said Chu.

　　A business reshuffle featuring a rise in mergers and acquisitions in the property sector is likely to occur because big property developers will swallow cash-strapped small ones that are less capable of withstanding price falls and fund shortage， analysts say.

　　Unlikely to crash

　　The new round of price declines in two years have crystallized worries of a grisly end to the housing boom， but analysts say fears of an American-style sub-mortgage crisis or Japanese-style collapse are overblown.

　　Lu Ting， an economist at Bank of America-Merrill Lynch， ruled out the possibility of a large-scale crash in China’s housing market. Instead， he said the biggest problem in the property sector is a misallocation of resources.

　　“With only about one third of the 1.3-billion Chinese population living in urban centers， too many homes that will never be filled have been built in small cities. This will likely see a sharp spike in bankruptcies among small developers，” Lu said. “But it will not cause a big crash.”

　　Fan Jianping， chief economist of the State Information Center， a top government think tank， also said there won’t be a collapse in the property market.

　　“The most important reason is that China’s home buyers are totally different from those in countries that have witnessed property collapse，” Fan said.

　　Fan predicted that it will take China 20 years to increase its urbanization rate to 70 percent. Before that， strong purchasing power exists among farmer-turned-city-dwellers， first-time home buyers and buyers who want to improve living conditions.

　　According to Fan， China is still a developing country， with a per-capita GDP of $6，700 and a very high savings rate. When property investment declines， the government can jack up infrastructure investment to cushion the impact of the real estate downturn. This is totally different from the conditions in countries that have a per-capita GDP of over $30，000 and an urbanization rate of over 70 percent. Those countries’ urban infrastructure construction has finished and investment opportunities are limited. China， on the other hand， has many alternatives to shore up economic growth， such as infrastructure construction， tenement housing renovation and the building of affordable housing.

　　Although price falls will bring about some financial risks， no systematic risk will occur， said Fan.

　　Wang Tianlong， an associate researcher with the China Center for International Economic Exchanges， said the most distinctive characteristic of China’s property market is polarized development between large cities and small cities. Wang suggested the government adopt differentiated policies for these two categories.

　　“For first-tier cities where housing prices are frothiest， moderate price drops can reduce the asset bubble and are on the whole good for economic growth. The government should stay out of it. For small cities that face more downward pressure， lifting purchase limits can prevent a price plummet，” said Wang. “In addition， the government should introduce preferential policies for first-time home buyers.”

　　By Zhou Xiaoyan