BEIJING // While China is posting double-digit economic growth after leaving behind the global economic crisis, its property sector is booming as developers build apartment blocks by the dozen.
But with prices having risen an average of 11.7 per cent in the 12 months to March, there have been fears of a crash. James Chanos, a hedge fund manager, went so far as to warn earlier this year that China was "on a treadmill to hell". By April the average annual increase had grown to 12.8 per cent. It was perhaps no surprise then that since April the government has introduced a slew of measures to try to pull the sector back into the boundaries of stability.
The State Council, the country's cabinet, instructed banks not to lend money to people to buy third homes. Lenders were also told to reject those who could not prove they had paid social-security contributions or taxes. Measures were also brought in to stop loans to developers that had hoarded land, and deposits on land purchases were increased. As well, tax breaks on the sale of homes were ended, curbs on pre-sales by developers introduced and minimum mortgage rates and downpayment requirements increased.
Several times this year banks were told to keep more deposits as reserves, another measure aimed at keeping a grip on lending. Early last month, Beijing introduced new restrictions on buying second properties. Six weeks on from when many of the measures were introduced, China's property market is feeling their impact, perhaps too strongly, with activity in the market having dropped off dramatically.
In Beijing and Shanghai, there were just 30 per cent as many transactions last month as there were in April. Shenzhen saw only 38 per cent as many deals. Some say the slowdown could last for months. Just as the number of transactions has slumped, so the value of property stocks has tumbled. One index of the share prices of nearly three dozen leading developers has fallen 30 per cent this year. Despite the effects the measures have had, analysts are predicting further action. In particular, it seems likely that a property tax will be introduced. It is expected to be a tax on those holding properties, rather than a transaction tax. This will give local authorities a more stable income and make them less reliant on the revenue from land sales, something that has helped fuel the price increases.
The reason the tax is needed, according to Kris Li, a property analyst at Shenyin Wanguo Research and Consulting in Shanghai, is that up to now the transaction volume has slowed, but prices have still not been affected significantly. Most developers have kept prices on released projects steady and have only made modest reductions in the initial prices of new projects coming onto the market. There is some evidence of weakening, but not on a large scale.
"If there's no introduction of a property tax, [buyers] will come back to the market," Ms Li says. "They will increase demand and there will be a very strong pickup in prices again. "That's why we feel it's necessary to introduce a property tax, otherwise maybe the softening will just be a short period and there will be a further strong pickup." Prices have remained relatively robust because developers tend to have sufficient liquidity, says Jinny Yan, an economist with Standard Chartered in Shanghai. They can sit tight and endure slower sales volumes, at least for now, instead of slashing prices to encourage more market activity and maintain revenue. Many have held off from announcing prices on new developments, waiting to see how the market will behave.
Homebuyers and investors are also playing a waiting game, wondering whether a property tax will be levied and concerned about the risk of a crash. Shanghai could introduce a property tax next month, Ms Li believes. In recent days it has been reported that city authorities have submitted a plan for the tax to the central government. Such a tax will mean the "market will get the message", says Isaac Meng, an analyst with BNP Paribas in Beijing. It will lead to "real structural change" in the market, speed up the adjustments seen so far and prevent further overheating. Such are the uncertainties thrown up by such a measure, however, that he prefers not to predict by how much prices might drop.
Ms Li expects they will fall between 20 and 30 per cent from their peak. Aside from the tax, prices may drop in any case because there is a limit to how long developers can withstand the low volumes of sales following April's measures. Most analysts give them another six months, Ms Yan says, so in the last quarter of this year prices could drop, with the total correction by the end of this year likely to be between 10 and 20 per cent.
In the first half of next year there will be further pressure on prices from an increase in the supply of units, she says, as developers start to build on their "land banks". "There are restrictions; you have to start construction within two years, and last year we saw huge acquisitions," she says. While there are many uncertainties in China's property market, many say a crash is unlikely. Mr Meng says there is little prospect of serious problems in the next three years.
"I don't see the banking system will have a big systematic risk," he says. Ms Yan says a market tumble is unlikely "simply because we've had the shock already in the market". "The risk of the crash will come from liquidity from developers," she says. "The big developers have enough. If you look at their balance sheets, they're still very solid." But they will be under pressure to keep sales up to reach their budget targets and offer something to their embattled shareholders.
"Maybe they will cut prices, but a property crash is pretty unlikely, looking at developers' balance sheets," Ms Yan says. The prices of commercial property are likely to have a slightly different trajectory. Massive investment in offices in 2007 has created oversupply, Ms Li says, and the market is close to bottoming-out. The increase in office prices is not likely to be dramatic, although with the Chinese government making the promotion of domestic consumption a big priority, retail property prices are likely to grow more robustly.