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Stashing cash like gold in vacant flats
June 24, 2010, Thursday
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Print Edition
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SHORTLY after residential property prices rose 15 percent in the 12 months to April, the government announced policy measures designed to cool the overheating.
Pundits are wondering whether real estate prices are about to come crashing down and what will happen to economic growth if they do.
Also up for debate is whether significant corrections will be confined to major cities, like Beijing, which have experienced remarkable housing price inflation, and whether the government's latest property-tightening measures will have a limited impact on overall economic growth and only on particular sectors, such as construction.
When the government launched a plan to help buoy the property market during the global financial crisis in 2008, many of its measures proved successful in staving off dramatic damage. As prices began rising, developers jumped on the bandwagon and construction activity picked up enough to help drive China's GDP growth.
The boom has had unwanted consequences. For example, property markets in various tier-one cities have become bubbly.
The government's 10 new property measures unveiled in April surprised observers with their forcefulness. Among the most stringent measures, down payments for first-time buyers have been bumped up from 20 percent to 30 percent and the minimum down payment for second homes has been raised from between 30 percent and 40 percent to 50 percent. Meanwhile, mortgage rates have been raised.
On the supply side, local authorities must now increase the amount of land available for public housing and mass-market residential properties, while accelerating construction projects for these areas.
There are signs that the policy push is making an impact. In the first week of May, home sales in 15 major cities reportedly fell nearly 40 percent in terms of both square feet and number of units sold, causing anxiety among some property developers. Evergrande Real Estate, for instance, anticipates a 15 percent decline in sales, while property mogul Pan Shiyi of Soho China has been blogging about the possibility of 15 percent to 20 percent being lopped off prices this year.
A growing number of analysts are bracing for a steep fall in prices this year, particularly in first-tier cities. The extent to which property prices nationwide will be hit depends in part on whether the provinces fall in behind the national policy. After all, local governments have an incentive to keep prices high given that land sales account on average for at least 20 percent of local government revenue.
Helen Qiao, a China economist at Goldman Sachs, points out that when, in the spring of 2008, average property prices in Shanghai fell 20 percent year-on-year and 33 percent in Shenzhen, foreclosures were low, even among borrowers whose properties were in negative equity. A survey of 150 Shenzhen property owners, whose property values were worth less than their outstanding mortgages, by China Industrial Bank in August 2008 found that only one foreclosed.
Historical comparisons may be instructive in other ways. Morgan Stanley's chief China economist Wang Qing says that in 2004 and 2007, policy makers were taking aim at high inflation and strong fixed-asset investment. Today, inflation is relatively modest and investment growth is moderating.
Wang does not see macro tightening as the main thrust of the new policies. "The primary purpose of these policy measures is to curb speculation and rein in rapid price increases," which goes in favor of more moderate implementation, he notes.
It is true that, by dint of the higher levels of debt accrued over the past two years, households and the government are more exposed to a property correction, points out Goldman Sachs's Qiao. However, absolute levels of household and government debt remain low, and asset levels are high.
Looking beyond short-term dynamics, most analysts see strong long-term prospects for China's real estate. Among the reasons: urbanization, demand for upgrading old housing, wealth accumulation and fewer households with different generations living together.
However, the pervasive concern is that a housing bubble could still have negative consequences. Professor Patrick Chovanec of Tsinghua University said: "What you see in the residential sector is people using empty residential units as a store of value, like gold."
And like gold, real estate does not produce anything, but in China it is a place where you can "stash your cash," as he puts it. "People are buying multiple residential units as a form of savings. They don't intend to live in them; they don't even intend to rent them out."
China's limited investment options are one reason why buying property is so popular, says Chovanec, and while investors have learned in recent times that the stock market does not inevitably move upwards, few have experienced a sustained downturn in real estate since private ownership of property became common in the early 1990s.
New mortgage restrictions will do little to discourage individuals with ready access to funds to buy properties for investment purposes, and instead will hurt people who need loans to buy houses they will actually live in, Chovanec reckons.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Shanghai Daily condensed the article.)
Pundits are wondering whether real estate prices are about to come crashing down and what will happen to economic growth if they do.
Also up for debate is whether significant corrections will be confined to major cities, like Beijing, which have experienced remarkable housing price inflation, and whether the government's latest property-tightening measures will have a limited impact on overall economic growth and only on particular sectors, such as construction.
When the government launched a plan to help buoy the property market during the global financial crisis in 2008, many of its measures proved successful in staving off dramatic damage. As prices began rising, developers jumped on the bandwagon and construction activity picked up enough to help drive China's GDP growth.
The boom has had unwanted consequences. For example, property markets in various tier-one cities have become bubbly.
The government's 10 new property measures unveiled in April surprised observers with their forcefulness. Among the most stringent measures, down payments for first-time buyers have been bumped up from 20 percent to 30 percent and the minimum down payment for second homes has been raised from between 30 percent and 40 percent to 50 percent. Meanwhile, mortgage rates have been raised.
On the supply side, local authorities must now increase the amount of land available for public housing and mass-market residential properties, while accelerating construction projects for these areas.
There are signs that the policy push is making an impact. In the first week of May, home sales in 15 major cities reportedly fell nearly 40 percent in terms of both square feet and number of units sold, causing anxiety among some property developers. Evergrande Real Estate, for instance, anticipates a 15 percent decline in sales, while property mogul Pan Shiyi of Soho China has been blogging about the possibility of 15 percent to 20 percent being lopped off prices this year.
A growing number of analysts are bracing for a steep fall in prices this year, particularly in first-tier cities. The extent to which property prices nationwide will be hit depends in part on whether the provinces fall in behind the national policy. After all, local governments have an incentive to keep prices high given that land sales account on average for at least 20 percent of local government revenue.
Helen Qiao, a China economist at Goldman Sachs, points out that when, in the spring of 2008, average property prices in Shanghai fell 20 percent year-on-year and 33 percent in Shenzhen, foreclosures were low, even among borrowers whose properties were in negative equity. A survey of 150 Shenzhen property owners, whose property values were worth less than their outstanding mortgages, by China Industrial Bank in August 2008 found that only one foreclosed.
Historical comparisons may be instructive in other ways. Morgan Stanley's chief China economist Wang Qing says that in 2004 and 2007, policy makers were taking aim at high inflation and strong fixed-asset investment. Today, inflation is relatively modest and investment growth is moderating.
Wang does not see macro tightening as the main thrust of the new policies. "The primary purpose of these policy measures is to curb speculation and rein in rapid price increases," which goes in favor of more moderate implementation, he notes.
It is true that, by dint of the higher levels of debt accrued over the past two years, households and the government are more exposed to a property correction, points out Goldman Sachs's Qiao. However, absolute levels of household and government debt remain low, and asset levels are high.
Looking beyond short-term dynamics, most analysts see strong long-term prospects for China's real estate. Among the reasons: urbanization, demand for upgrading old housing, wealth accumulation and fewer households with different generations living together.
However, the pervasive concern is that a housing bubble could still have negative consequences. Professor Patrick Chovanec of Tsinghua University said: "What you see in the residential sector is people using empty residential units as a store of value, like gold."
And like gold, real estate does not produce anything, but in China it is a place where you can "stash your cash," as he puts it. "People are buying multiple residential units as a form of savings. They don't intend to live in them; they don't even intend to rent them out."
China's limited investment options are one reason why buying property is so popular, says Chovanec, and while investors have learned in recent times that the stock market does not inevitably move upwards, few have experienced a sustained downturn in real estate since private ownership of property became common in the early 1990s.
New mortgage restrictions will do little to discourage individuals with ready access to funds to buy properties for investment purposes, and instead will hurt people who need loans to buy houses they will actually live in, Chovanec reckons.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Shanghai Daily condensed the article.)
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