Feng shui masters are telling fund managers to invest cautiously during the Year of the Horse, China’s traditional lunar year that started on January 31. A famous Hong Kong fortune teller reportedly said 2014, in the ancient 60-year zodiac cycle, represents “instability and disruption.”
The projection doesn’t do much good for the speculators that have already poured their money into China’s real estate sector. Prices in first-tier cities, namely in Beijing, Shanghai and Guangzhou, will likely continue to grow moderately this year. However, for the investors that went big on property buys in China’s smaller cities, 2014 is set to be disappointing.
Big cities will stabilize, “but to most inland cities, the second- or third-tier cities, I don’t think it’s a good year,” Shao Yu, executive director and chief economist at Orient Securities, said last week during a talk with journalists in Shanghai. “Because [developers] already provide a huge supply, so the price I don’t think has any chance to go up. They can simply go down.”
Last year was a wild ride for the mainland real estate market. Prices coming off of a low base topped 20% year-on-year growth in some of the biggest cities. Transaction volumes rose to record levels.
Yet amid the dizzying highs in cities such as Shanghai and Guangzhou, month-on-month price growth in many smaller cities across China began to slow starting in the second quarter. By December, prices were falling month-on-month in two cities and had leveled out in three. More could join that downward trajectory in January and February. Official property data for January comes out early next week.
Prices in Wenzhou, a major manufacturing hub in coastal Zhejiang province, have fallen for 29 consecutive months, largely the result of strict housing controls imposed in 2010 on the rapidly expanding market. The news has only grown bleaker for the speculators that rushed into Wenzhou in 2009. According to one report, transaction volumes have dropped 50-60% since then. Apartments that sold for up to US$8,244 during the boom days now go for US$3,793, a more than 50% decline.
The speculative investors in Shaoguan, a southern city, are no doubt looking at the Wenzhou case with trepidation. In December, that city became the second to join Wenzhou in the month-on-month decline. Three prefecture-level cities, Zhanjiang, Bengbu and Yueyang, are teetering on the edge.
A severe drop in prices in smaller cities is unlikely. Yet, without stronger demand in small cities that have experienced extensive build-outs in housing supply, prices should decrease.
“I don’t think it’s going to be a property-price collapse, like a 20-30% drop, but if there’s not a more concrete plan for urbanization into those smaller cities, there could be pressure on prices,” said Frank Miao, a senior equity analyst at Hong Kong investment bank China Galaxy International.
The government has been trying to divert migrants into China’s smaller cities instead of just its mega conurbations of the likes of Shanghai. Still, the State Council has yet to deliver a “master plan” for urbanization that will lead this type of growth for the next decade.
Perhaps Li Ka-shing read up on his feng shui last year. In October, the Hong Kong Tycoon pulled out of many of his Beijing real estate investments, sending ripples through the market.