Regional Statistics

China’s property market slowing sharply again!

China’s once booming property market is now on a verge of a slump, amidst government efforts to cool down house prices. House price rises are decelerating sharply. Property demand is now waning. Mortgage defaults are increasing. And, construction activity is falling.

Year-on-year, average new home prices rose by 4.72% in July 2014.  But it is the month-on-month and quarter-on-quarter figures which look worrying. House prices of the 100 Chinese cities surveyed fell 0.8% in July 2014, after m-o-m declines of 0.5% in June 2014 and 0.3% in May 2014, according to the China Real Estate Index System (CREIS).

Out of 100 Chinese cities surveyed, 76 saw falling house prices month-on-month.

In Shanghai, house prices dropped 0.54% (-0.63% inflation-adjusted) in July 2014, on a quarterly basis. During the year to July 2014, the second-hand house price index in Shanghai rose by 4.81% (2.4% inflation-adjusted), the slowest pace of increase since March 2013, based on Ehomeday .

Beijing house price rises are also slowing sharply, according to the National Bureau of Statistics of China (NBSC). Quarter-on-quarter, house prices in the capital dropped 2.33% (-1.98% inflation-adjusted) during the latest quarter. In Q2 2014, the price indices of second-hand residential buildings in Beijing increased by just 4.72% (2.31% inflation-adjusted) from the same period last year, a sharp deceleration from the annual house price rises of 12.63% in Q1 2014, and 19.82% in Q4 2013.

Construction activity is also falling. In the first half of 2014, new construction starts by area plunged by 16.4% from the same period last year, to 801.3 million square meters (sq. m.).

Demand is waning. Housing sales fell by 9.2% in the first half of 2014 from the same period last year, to CNY2.56 trillion (US$412 billion), based on figures released by the National Bureau of Statistics. In June alone, housing sales dropped 5.3% to CNY591.2 billion (US$96.24 billion) from a year earlier, after y-o-y declines of 10.8% and 15.4% in the previous two months. By floor area, housing sales fell by 3.5% over the same period. This was a sharp turnaround from the 27% annual rise in housing sales seen in 2013, to CNY6.8 trillion (US$1.11 trillion).

There are also rising numbers of mortgage defaults. Most defaults have been corporations that bought projects and homes at inflated prices financed completely by bank loans, with no equity. As house prices drop, an increasing number of households and corporations are defaulting on their mortgages. These defaults have occurred in Hangzhou, Zhejiang Province; Ningde, Fujian Province; Wuxi, Jiangsu Province; and Xinyi, Jiangsu Province.

To boost demand, the Chinese government has eased property market controls since April 2014, accelerated infrastructure construction, and relaxed reserve requirements for small banks to buoy lending.

Local governments also eased access to capital and even ended restrictions on multiple home purchases.

Fujian province introduced tax incentives for property purchases in July 2014. Sichuan province subsidized mortgages. Foshan’s southern city eased restrictions on multiple apartment purchases. The local governments of Hohhot, Jinan, and Nanchang have also loosened curbs on home purchases to deal with a glut of apartments. Moreover, out of the 47 Chinese cities with home purchase limits, 34 have relaxed their policies, while a dozen have removed controls altogether.

Then there are multiple developers’ gimmicks. For an instance, Champs Elysйes development is giving away bottles of Chanel perfume to those who come for viewings.  Other developers offered cheap loans to finance down payments. Some even promised to repurchase homes after a specified period. In Hangzhou, Shanheng Real Estate Group is offering homebuyers an option to sell back their apartments in five years for 40% above the purchase price. Likewise in Wenzhou, DoThink Group is giving homebuyers the option to resell their homes for 120% of the purchase price after three years.

Predictions about the future of China’s property market are mixed.

“The most likely scenario is that property data may stabilise or even improve in the coming months thanks to the whole gamut of easing measures, but the recovery will probably grind to a halt entering the fourth quarter,” said Wei Yao of Sociйtй Gйnйrale.

Likewise Jinsong Du of Credit Suisse Group AG says: “It’s still uncertain where the housing market will go in the next two months. But at least the downward trend on housing transactions may not continue because of seasonality as well as because of the supporting measures.”

However, others are more pessimistic. “The falling trend of China’s property market has no sign of improving,” said Shen Jian-guang of Mizuho Securities Asia Ltd. “The key issue is the mortgages, despite all types of local government easings. The high rate is damping sentiment.”

In the second quarter of 2014, China’s economic growth stood at 7.5%, slightly up from the annual GDP growth rate of 7.4% in Q1 2014. The economy is expected to expand by 7.5% this year, after annual real GDP growth rates of 7.7% in 2012 and 2013, 9.3% in 2011, and 10.5% in 2010, according to the International Monetary Fund (IMF).

China ’s property boom and bust

Property prices in China rose rapidly from 2000 to 2008, fuelled by low interest rates and cheap credit. Shanghai’s second-hand homes price index soared 121% (85% inflation-adjusted) from Q1 2003 to Q2 2008, according to Ehomeday.

However from 2011 to 2012 Chinese house prices increased only 1%, actually dropping by 4% when adjusted for inflation.

Last year, the property market bounced back, with house prices surging by 13% (10% inflation-adjusted).

Fearing that it would result to a property bubble, new policies were introduced by the State Council in March 2013 aiming to control skyrocketing house price increases:

• Every first quarter of the year, major cities should publish an annual housing price control target.
• Cities with overheating housing markets are to raise their commodity housing and land supply, while cities with declining prices should keep prices stable by stimulating housing demand.
• In cities where price hikes exceed their price control targets, local People’s Bank of China (PBOC) branches will increase down payment requirements.
• Tighter mortgage restrictions on second home purchases will be implemented in banks. Buyers without a local registration are barred from buying more than one property.
• Banks should not give loans to developers that hoard land and participate in price-inflating activities.
• Local governments must boost low-income housing production.
• The government will continue to reform property taxes, to include an extension of the trial holding tax from Shanghai and Chongqing to other cities, and a transaction tax.

Some local governments have implemented even stricter lending conditions, while some banks slowed or even stopped their mortgage lending.