China’s Real Estate Market Running out of Steam

By Gao Zitan

Empty apartment buildings are reflected in a window in the city of Ordos, Inner Mongolia on Sept. 12, 2011. The city which is referred to as a 'Ghost Town' due to it's lack of people, is being built to house 1.5 million inhabitants. (Mark Ralston/AFP/Getty Images)

Andy Xie, former Morgan Stanley “star” chief Asia-Pacific economist, has been warning about a real estate bubble in China since 2002 and predicted that China's real estate market will collapse in 2012.

All the conditions for a real estate collapse in China seem to be in place: there’s a glut of unsold homes, prices are ski-high, and money supply is tight.

China presently has 16 billion square meters (170 billion square feet) of unsold new homes.

Many Chinese with money have invested in the booming real estate market in recent years. They bought multiple homes or apartments, which they could never rent, believing that the market would keep going up indefinitely, and their investments would pan out.

New real estate regulations earlier this year put a stop to this sort of speculation. Now families in some major cities are allowed to buy only one extra home beside their own residence.

In addition, China’s central bank keeps tightening monetary supply to curb inflation, making it hard for almost anyone to get bank loans, except through loan sharks at exorbitant rates.

Xie, who accurately predicted the crash of Hong Kong’s property market and the Asian financial crisis, advises all his Chinese friends to sell their vacant rental properties—even at reduced prices if needed, he told Tianfu Morning News recently.

Although home prices have not decreased significantly, sales have slowed. According to Xie, China’s housing market will keep decreasing, and he expects prices to drop dramatically.

“While the real estate market in the whole world is slumping, only China expects it to stay hot for long. In fact, it is not an exaggeration [to say] that China’s property prices may drop 70 percent in the future,” Xie said.

Xie said despite the great numbers of shutdowns by small and medium-sized enterprises putting pressure on Beijing to ease the tight money lending policy, it won’t happen any time soon. Against the backdrop of long-term inflation, the money shortage won’t become any better this year, or the next, he said, and the property market will thus be severely affected.

Xie said many real estate developers at present have the attitude that they can hold on for a few months, and when the monetary policy eases, they will push land prices up again. They even take out loans with interest rates of 30 to 40 percent.

“But once the monetary policy continues to tighten, a lot of developers are facing closures,” Xie warned.

The Beijing Real Estate Trade Management Website, a state website providing housing information, shows a 22.9 percent drop in pre-owned home sales for August as compared to July, and a 29.6 percent drop compared to the same period last year. Compared to 2009, sales dropped 64 percent, reaching their lowest point since 2009.

According to the latest data released by China’s Index Research Institute (IRI) on Sept. 21, among 35 cities monitored, the turnover of properties in 20 cities dropped compared to last year, with drop rates in 12 cities being more than 30 percent. For major cities, only Wuhan saw a rise, but all the rest dropped, and most of them dropped more than 50 percent compared to the same period last year.

The IRI report also showed a downslide in the land market, pointing to a sharp drop of land supply last week.

According to IRI, the 20 major cities monitored “released” 197 lots of land for sale last week, 63 fewer than the previous week. The total land area for sale decreased by nearly 50 percent.

Xie said at present, the supply of new homes in China has reached 16 billion square meters (170 billion square feet). In addition, developers are holding three billion square meters of land.

“Only when developers drop home prices to the level that first-time buyers can afford, will the surplus of homes be sold,” he said. “It means that prices of houses should drop significantly.”


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