This is
something we need to watch although it is unclear what the impact will be
externally. A slowdown in China is long
overdue and would allow productive consolidation.
The problem here
is that expensive real estate has served as a place to store capital in a
country that lacks too many alternatives.
Thus a decline essentially sharply reduces all that stored demand.
Most likely the
Chinese will succeed in expanding demand in other sectors of the economy while
allowing the real estate sector to truly consolidate. They have largely shown understanding and
skill at redirecting resources and I simply do not expect that to change soon.
China
Appears on Verge of Dangerous Real Estate Decline
Real estate is one of the most important sectors of
the Chinese economy, and for years has one way or another driven much of the
country’s economic growth. But in January, the number of houses bought and sold
across China dropped precipitously compared to the same time last year.
The price at which properties were sold only dipped
slightly, meaning that the industry is not in crisis, but growth in real estate
prices grew at a slower pace in January than it typically does.
Both of these trends — few transactions, and a price
tending toward stagnation — are warning signs to the real estate industry in
China. Experts have for years argued and speculated about whether and to what
degree the Chinese real estate market was a bubble, and when it would burst or
deflate.
“Housing prices in China’s first tier cities are not
likely to drop sharply soon, but they won’t increase much either,” said Jason
Ma, a senior commentator on economic issues with New Tang Dynasty
Television.
The Price is Too High
Slowing sales owes to the excessive price of housing
in China, Ma said.
“Housing prices in first tier cities like Beijing
and Shanghai are higher than in the United States, but the average Chinese
salary is only a tenth of Americans’. The group of people who purchase real
estate is shrinking.”
Sales Slow
The recent news comes
from China Index Academy, which
monitored the real estate markets in 43 major Chinese cities, including first
tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen. (China rates
cities in tiers based on their levels of development, with first tier being the
most developed.)
The report shows that more than 90 percent of the
monitored major cities saw declines in volume in January.
The volume of trade in Beijing, Shanghai, and
Shenzhen declined by 30 percent compared to December, with some, such as Dalian
and Bengu, dropping more than 50 percent.
One factor that contributed to the low trade volume
is the Chinese New Year, which goes for around and week and began on Jan. 31
this year, 11 days earlier than last year.
The volume was lower than January last year,
especially in first tier cities. Beijing’s buying and selling of pre-owned
houses was less than half of that last January. Guangzhou’s trade in real
estate also dropped by nearly half of that last January.
Housing prices have been increasing steadily for a
long time in China, but in 2013 this trend showed signs of tapering. Prices
only edged up in half of the monitored cities in January.
The Global House Price Index prepared by Knight Frank, a major real estate
consultancy, shows that mainland China’s housing prices increased the second
most in the world in 2013, by 21.6 percent. Dubai increased the most.
Jason Ma, the economics commentator, said that
housing purchase restrictions in 2010 restrained sales. These restrictions
stipulate that only official residents of major cities can have two houses per
family, and residents of other cities can only purchase one house per family.
Risk
For years, Ren Zhiqiang, one of the largest property
developers in China, said he has been attempting to draw attention to the risks
in China’s real estate market. He is chairman of Huayuan Property, which has a
market capitalization of 4.5 billion yuan, ($740 million).
He alerted investors to slowing house prices in a
real estate award ceremony on Jan. 21 of this year.
“I’ve raised the topic of ‘risk’ in real estate
reports for the first time in over 10 years,” Ren said. “It’s a very dangerous
thought that developers still believe house prices will increase like in 2013.
That’s my biggest worry.”
Housing price growth has been worse in third and
fourth tier cities so far this year, with a declining trade volume for the last
three months.
‘Ghost Cities’
The slowdown in the real estate market is having a
more pronounced impact on the smaller cities than many predicted.
“Real creative and big companies in China are
located in top tier cities, and almost none of them are in China’s third and
fourth tier cities. This leads to brain drain and population outflow in those
places,” Jason Ma said.
“So small cities can only rely on natural resources
such as mining or government projects. But local governments have less and less
ability now because of huge local debts.”
This exacerbates what observers have called “ghost
cities”: under-occupied cities, where vast sums of money has been spent on real
estate projects that then generate insufficient income to service the enormous
debts.
“It might be too early to reach a conclusion on
China’s real estate market collapse,” Jason Ma said. “But if the trade volume
keeps trending low like this throughout February, it may be a signal that
housing prices are in a dangerous place.”
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