With May property prices up 12.4% year-on-year – near record levels despite market cooling measures – the slowdown that Beijing and new home buyers have been looking for has yet to come. Some analysts still expect an imminent price correction of up to 30%, but this is unlikely given the history of China’s property market. If and when developers cut prices, it will be to boost slowing sales, not because of policy or potential market-killing regulations like a property tax. Beijing, with an eye to past mistakes, is all too aware of the dangers of derailing the real estate market. Severe austerity measures introduced in late 2007 were compounded by a decline in homebuyer sentiment in 2008. Prices and transaction volumes fell by as much as 20%, but there was no nationwide collapse – just a period of stalled growth. The majority of property developers’ profits swelled as China’s economy revived in 2009. As a result, they are reluctant to cut prices. This will likely change, though not drastically, in the third quarter as developers come under pressure to keep cash flowing through the books. While prices in May soared, floor space sold fell by 12.74 million square meters from April to 67.77 million sq m, an overall drop in sales value of 25%. Some estimates suggest transactions in Beijing, Shanghai and Shenzhen dropped by as much as 70%. The marked decline in sales in first-tier cities was to be expected, and it shows that Beijing’s targeted tightening strategy – focusing on overheated segments rather than the market as a whole – is working. Most policies have been directed less at end-users than purchasers of additional homes, widely blamed for soaring prices. Similarly, tougher mortgage lending criteria are intended to cool speculation activity, not scare off first-home buyers. Moreover, policymakers are keen to move away from the unpredictability of boom-bust cycles toward a measured growth curve. This is essential for balancing property values, homebuyer sentiment, developers’ profits and local government tax revenues. Small prices cuts are eminently preferable to an acrossthe- board crash in property values.
It takes time for the effect of tightening measures to be fully realized in the physical market. For this reason, Beijing should hold off on any further action until at least well into the third or fourth quarter, when price and sales data will dictate what happens next.