After charting blistering first-half earnings growth, Chinese developers have become jittery over the prospects for the second half amid signs Beijing is getting serious about high-flying property prices.
The China Real Estate Association (CREA), representing mainland developers, said last week it had sent a letter to the State Council, lobbying the central government to delay the launch of new tightening policies on the property market.
The news comes at a time when the China Banking Regulatory Commission (CBRC) is quietly conducting a second round of stress test to see if banks can survive a bigger blow – an up to 50% fall in house prices in key cities such as Shanghai and Beijing. The CBRC is also monitoring credit extended to the upstream industries, such as cement and steel, from the real estate market to gauge the influence of a hypothetical housing market collapse.
There is, however, no reason for panic, at least not among ordinary property owners. Beijing is highly unlikely to stand by and watch house prices freefall, ruining the country’s financial stability and derailing economic growth in the process. Economists agree that the 50-60% price collapse featured in the stress tests is so extreme there is little chance of it happening.
An earlier stress test showed that domestic banks would be able to sustain a price decline of up to 30% without incurring a drastic rise in non-performing loan ratios. But the benign result was something not desired in a real stress test. For its part, the CBRC has been keen to point out that the stress test scenarios did not reflect regulators’ forecasts for the property sector, nor did they reflect any change in policy.
But the tests did send a clear signal to the market that Beijing is not satisfied with the implementation of existing tightening policies – intended to tighten mortgage lending and curb excessive property investment – and is mulling additional moves. Although transactions volumes have dropped sharply from a year ago, average houses prices in 70 major Chinese cities in July were largely unchanged from June.
Meanwhile, property developers have been raking in profit. Net income for the top 30 domestically-listed developers amounted to US$835 million for the second quarter, up around 25% on the first three months of the year. Market leaders China Vanke (000002.SZ), Poly Real Estate (600048.SH) and Gemdale (600383.SH) all chalked up strong sales.
In this climate, CREA’s letter to the State Council might be seen as a desperate attempt to delay the inevitable. The association said existing tightening measures are having an effect and warned that declining transaction volumes might cause problems in the first-half of next year, with developers leaving recently purchased land idle due to the falling demand. It also suggested that the central government create new investment options so individuals are no longer drawn to real estate through a lack of alternatives.
The association’s argument that transaction volumes will stay low next year bears little merit. A number of friends and colleagues in Shanghai tell me they are re-considering property investment after seeing rentals for both residential and commercial projects climb in the past several months. Others are already busy looking for apartments in the hope of capitalizing on an expected 5-10% price drop in the second half.
This is a reflection of the growing trend among Chinese people for buying property as a means of maintaining asset value. With the stock market on the rocks and interest rates still low, there are too few safe, profitable places to invest money in China. CREA’s point to the State Council about investment channels is therefore a fair one.
A residential project developed by Wharf Holdings in Shanghai’s northeastern New Jiangwan Town recently sold all 62 units available within hours of putting them on sale. These apartments, all with a gross floor area space of more than 160 square meters, were sold for an average of RMB43,776 per square meter. This would suggest that investor sentiment is rallying with regards to mid- to high-end residential projects.
The question is: At what point will Beijing deem the price situation out of control and roll out tougher tightening measures such as the much-mooted property tax?
Under the current scenario, aggressive action is unlikely. Going forward, the central government is focused on two areas: punishing developers that hoard land for profits and increasing the supply of budget housing. It has already been reported that the Housing Ministry will hand the CBRC a black list of property developers deemed to be stockpiling houses or violating regulations for sales. These companies will have difficulty getting funding.
While there will undoubtedly be some cyclical swings in property prices, growth in major cities like Shanghai and Beijing should stay generally robust over the next couple of years. This is simply because ongoing urbanization guarantees fresh sources of demand.
The housing market boom in China today is comparable to that seen in Japan in the 1970s. The slump of 1974 and the global oil shock shortly thereafter were only temporary glitches in what was a growth story driven by a combination of rapid economic growth, urbanization and rising household incomes. Japan’s 1980s boom, however, took place when urbanization was largely completed and so it couldn’t be sustained. A plunge in the early 1990s threw the country into its “lost decade.”
As long as China keeps growing at a rapid pace and there are still people moving into the cities from rural areas, the housing market will retain strong fundamentals for expansion. Besides, Beijing needs a steady real estate market to maintain economic and social stability.