– Property Prices Collapse in China. Is This a Crash? (Forbes, Nov. 6 , 2011):
Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.
What started slowly in September turned into a rout by the middle of last month—normally a good period for sales—when Shanghai developers started to slash asking prices. Analysts then expected falling property values to move Premier Wen Jiabao to relax tightening measures, such as increases in mortgage rates and prohibitions on second-home purchases, intended to cool the market
They were wrong. After a State Council meeting on October 29, Mr. Wen affirmed his policy, stating that local authorities should continue to “strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.” Then, the selling began in earnest as “desperate” developers competed among themselves to unload inventory. One builder—Excellence Group—even said it would sell flats in Huizhou at its development cost.
Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.
When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse. In any event, the markets are bracing for trouble. Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market, late last month said he is still not covering his short positions on China.
One does not have to agree that China will be “Dubai times 1,000—or worse”—Chanos’s memorable phrase—to understand that the unwinding of “the biggest housing bubble ever created” will be especially painful. Analysts have great confidence in Beijing’s technocrats because they managed to continue to manufacture growth through the global downturn, but most of us seem to forget that the Chinese, through massive stimulus, created even bigger challenges for themselves. At the moment, Beijing has yet to resolve two intractable problems: persistent inflation and artificially high property prices.
The dominant narrative at the moment is that China’s economic managers will skillfully deflate the property bubble and land the economy softly. As Time observes, “Many observers say a sharp economic decline won’t be permitted to happen before the change of leadership in 2012.”
Won’t be permitted? It is true that Beijing’s technocrats have had the advantage of working in a semi-closed system that has allowed them to use the considerable resources of the state to achieve outcomes not possible in freer economies. Nonetheless, they can continue to do so—in other words, defy economic principles—only as long as market participants—in this case builders, local officials, and homeowners—cooperate.
The last four weeks, however, must have been a sobering period for Premier Wen, and not only because developers began to lose their nerve. For one thing, recent purchasers have taken to the streets because they had suffered losses even before taking possession of their homes. A crowd of about 300 people in Shanghai smashed windows at the sales office of Longfor Properties on October 22, two days after the builder had ended a sales promotion on a project. The protestors had bought properties in earlier phases of the same project at prices as much as 30% higher than the discounted ones.
And then, on the 23rd, a smaller crowd—on the same street—demonstrated against another developer, Greenland Group. Protesters were injured in Shanghai at another demonstration, this time against a unit of China Overseas Holdings. There were also protests against builders in Beijing and in other cities, Hangzhou and Nanjing.