China's Housing Slump Shakes Developers

An analysis by Michael Lelyveld
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A saleswoman (R) waits for customers at the entrance of a real estate agency in Beijing, May 30, 2014.
A saleswoman (R) waits for customers at the entrance of a real estate agency in Beijing, May 30, 2014.

Slumping sales in China's real estate market have raised concerns that property prices and the economy could soon be in for a dangerous drop.

After years of double-digit price jumps, China's home sales have stalled, leaving developers in the lurch and pushing some realty companies to the brink.

At first glance, official figures suggest only a mild decline.

New home prices rose in 44 of 70 surveyed cities in April, compared with 56 a month before, the National Bureau of Statistics (NBS) reported. Eight cities recorded lower prices, twice as many as in March, state media said.

Average price growth slowed to 0.1 percent, dipping from 0.3 percent in March, according to the NBS.

But the pace of price hikes was far slower than the 1-percent month-on-month gain in April 2013, when 67 of the 70 cities showed gains and prices in Beijing climbed 10.3 percent from a year before.

The number of home sales this April fell 18 percent from the previous month, setting off warnings of a price plunge to come.

Initial reports for May suggest further weakness.

A survey of 100 cities by the China Real Estate Index System found that home prices declined from a month earlier for the first time in two years, Reuters reported.

"If home sales keep falling, price cuts will sure spread, and probably deepen as well," said Dai Fang, an analyst at Zheshang Securities Co. in Shanghai, cited by Bloomberg News.

The cooling of the property sector is a victory of sorts for the government of President Xi Jinping and Premier Li Keqiang, which ordered a stiff capital gains tax on home sales in March 2013 to stop speculation and make housing more affordable for first-time buyers.

The market was slow to respond as many cities either ignored the order or wrote their own rules to hamper investment in second and third homes.

Now there are concerns that loan limits and other measures could soon take effect with a vengeance, dragging real estate companies and the economy down.

"The data underscore our view that the property market poses the greatest risk of a sharper-than-expected slowdown," said Fitch Ratings in research note, quoted by the official English-language China Daily.

In the first four months of the year, the total value of home sales fell 9.9 percent from the year-earlier period, Bloomberg reported.

Property dump

The sales slowdown has already led to isolated cases of deep discounts as heavily-indebted developers try to dispose of unsold units.

Last week, China Daily reported that some cities including Shenzhen and Dongguan have refused to register sales if the prices have been discounted by more than 15 percent.

The move is seen as an attempt to keep property prices from dropping too far or too fast.

A study last month by Credit Lyonnais Securities Asia estimated that 10.2 million apartments in China are vacant. That number could rise by 3 million to 4 million per year, the analysts said.

Stagnation has also forced major real estate firms to lay off workers, China Daily said, citing National Business News.

One unquantifiable factor is the government's anti-graft campaign, which has reportedly driven corrupt officials to dump high-priced properties on the market before they are forced to account for illegal wealth.

"As a result, ordinary people who want to sell homes in the secondary market must face steep price cuts," said a top official of leading real estate developer China Vanke in a private meeting, cited by the website

The company has disclaimed the comments, but The Wall Street Journal also quoted the official as calling the rise in Beijing's land values "scary," comparing it to a bubble about to burst.

Last month, Pan Shiyi, chairman of property developer Soho China Ltd., raised further alarms.

"I think China's property market is like the Titanic and it will soon hit an iceberg in front of it," said Pan, according to China Business News.

Widespread effects

Although the official press has featured frequent assurances, the effects of a major price slide could be widespread.

Homes represent 66 percent of household assets in China, and as much as 84 percent in Beijing, said a study by Southwestern University of Finance and Economics in Chengdu. The comparable share in the United States is 41 percent, The New York Times said.

So far, there is little certainty about the extent of the price drop or the effect on the economy.

Reuters estimates that property investment generated about 12 percent of China's gross domestic product (GDP)—the broadest measure of the economy—in the first quarter, down from 15 percent last year.

In a report last month, Barclays Plc said that a 5-percent decrease in property investment would cut GDP growth by one-half of a percentage point.

Concerns have also focused on the potential damage to China's banks, which have underwritten the property sector and may now face a wave of defaults on loans.

In an analysis in late April, the Peterson Institute for International Economics in Washington said that bank losses are likely to be bearable but perhaps not as inconsequential as some forecasts suggest.

China program manager Nicholas Borst noted an estimate by China's Bank of Communications that a 30-percent price drop would have "little or no impact" on non-performing loan (NPL) ratios.

Bad loans in the first quarter stood at 1.04 percent of total lending, up from 1 percent in the previous quarterly period, the China Banking Regulatory Commission said.

While the ratio is still low, it has risen for 10 consecutive quarters. NPLs in the latest period reached 646.1 billion yuan (U.S. $103.6 billion), the highest since September 2008, Bloomberg reported.

The Bank of Communications Financial Research Center has argued that even a price slump of 40 to 50 percent would raise the NPL ratio by just 3.8 to 5.6 percentage points, putting it on a par with levels last seen in 2007.

The forecast makes the case that China's banks could keep operating relatively normally even after a steep price decline.

"If history is a guide, however, things will be a bit more complicated," Borst said.

For one thing, property development is linked to key industrial and consumption sectors that would magnify the impact of a downturn beyond the direct effect on 12 percent of GDP.

Separately, Moody's Analytics found that the construction, sale and furnishing of apartments accounted for 23 percent of GDP last year, giving real estate greater weight in the economy, The Wall Street Journal reported.

Another consideration is that mortgages are used to back over 40 percent of bank loans, reducing the value of their collateral, Borst's analysis said.

Consumers are also likely to cut back on spending when they sense a drop in their property values and net worth.

Without predicting a collapse in the market, Borst warned that a correction would have "large consequences beyond simply an increase in developer defaults and mortgage foreclosures."

Flagging market

Yukon Huang, senior associate in the Asia program at the Carnegie Endowment for International Peace, said that a series of variables acting on households may determine when the effects of a property price drop will be felt.

In an email message, Huang said that even buyers who invested fairly recently are likely to be protected against a correction because prices have risen so much.

"Anyone who bought their home before 2013 will have a healthy gain," said Huang. His own apartment in China has appreciated by 500 percent over the past seven years, he said.

"Thus, it would take a price decline of 70 percent before I will have lost," Huang said. But he warned that "the negative wealth effect can still be serious."

China is not facing the same kind of cascade effect that dragged down banks in the United States during its mortgage crisis because most Chinese buyers paid cash or made high down payments for their property purchases, he said.

NPL ratios are low and provisions have been made for possible losses.

"But the problem is the negative impact on construction and GDP growth of reduced housing starts, which could lower overall growth by a percent or more in the coming years," Huang said.

Even that risk appears to have prompted economic concerns as the government struggles to meet its target of 7.5 percent GDP growth this year.

On May 13, the People's Bank of China (PBOC) issued a statement calling on commercial lenders to speed up loan approvals for "eligible" home buyers, the official Xinhua news agency reported.

PBOC vice governor Liu Shiyu urged banks to "set the interest rates of loans for first-time home buyers at a reasonable level after taking sustainability and risk management into account."

The move is seen as a half-step to encourage the flagging market that falls far short of any significant easing of credit that might reawaken speculation among multiple property owners.

But a host of municipal authorities have started to show more concern about the downturn in property sales.

Since April, at least six cities announced plans to support housing sales or allow purchases of more than one unit, state media reported.

The list includes Nanning in coastal Guangxi Zhuang Autonomous Region, Wuxi in eastern Jiangsu province, Tianjin Binhai New Area of northern Tianjin municipality, and Ningbo in eastern Zhejiang province.

On May 23, share prices of realty companies jumped after China's Southern Weekend newspaper reported that the central government would allow all but the four largest cities to "adjust" home-buying restrictions and ease market curbs.

But Bloomberg News said it was unable to confirm the report with the Ministry of Housing and Urban-Rural Development, and the status of the policy remains unclear.





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