While the first quarter of 2005 saw the longest buying queues ever seen in modern Shanghai, the last few days of May saw the longest, most aggressive queues of sellers. This statement is of course, nonsense; for every buyer there is a seller and vice versa. The point is that the days of the spectacular property flip are over (for now at least) and a new regime is in place where the game is more about buying a flat someone might actually want to live in or to let to someone else. This will require new skill sets for both developers, no longer able to just build anything and sell off 12 to 18 months ahead of completion, and buyers who will have to repackage themselves as landlords to secure income rather than just looking to sell as soon as it suits them.
None of this will come easy to either side. Most buyers and sellers out there have never experienced this kind of market. Shanghai saw something similar after the boom in the mid 1990s when ill-thought-out villa schemes to the west of Shanghai, and other developments, hopped before and during the Asian financial crisis. While prices did not fall by much, some developments only started selling at 1995 prices.
The queues at the Property Exchange Bureau on May 31 were prodigious, and it appears a riot would have ensued had the officials on duty tried to close at their usual time. Wisely they didn't, and those queuing got their deals through, thus saving themselves the burden of the new tax rates outlined in the table on the right.
New taxes explained
The introduction of the new tax levied on sales of property within two years (5% of the total value) and the requirement for vendors to pay off the mortgage in full before selling if a sale is taking place within 12 months of purchase will hit speculators, who account for 30-50% of the market in some areas. A slowdown in sales of certain types of new property has already been seen since the plans were announced in mid-May. In the "new? Gubei, in the west of the city, and Lianyang in Pudong, for example, stacks of empty, speculator-held flats, according to a "lights out" survey, can be expected to see price falls of 10-30% as the steam comes out of the market. A slowdown in the number of transactions on the secondary market is also already apparent.
All this marks a new beginning. May 31, 2005, was a watershed in the Shanghai housing market and the market should be quiet for three to six months, or until downward price adjustments are sufficient to draw buyers back. But owner-occupiers will continue to buy during this period, albeit at a slower, more cautious rate as many prefer to sit on the sidelines to see how much deflation actually materializes. Beyond that, investors will start to hone their skills as landlords rather than flippers.
In areas that attract owner-occupiers or buyers who hold properties more than two years, assets should see little in the way of price falls as the sort of property that attracts owner-occupiers attracts tenants and prices tend to be underpinned by rental income. Agents have to adjust too; many are closing.
A buyers' market is definitely emerging. We haven't had one for a few years. Prices down by 20% only means they are back to where they were last December, so this is an opportunity for those who pulled back from buying in the first quarter when it was still a sellers' market and found the whole process a bit much.
I have long suggested that real estate provides the best window into the way markets in China are regulated. Real estate is a fast-moving business and the most capitalistic of industries in what is still a communist country. Regulation is often developed "on the hoof" rather than with the luxury of time and space to think things through and there are often a range of vested interests that blur the interests of the various organizations involved. The result was last year's administrative controls that proved more irritating than constructive, while these latest measures have probably been developed as "plan C" ("plan A" limited development size and approvals dating from early 2003).
Of course, regulation is incredibly difficult. How can regulators know what works in Shanghai will work in Sanya, Harbin or a little town like Qingyang in Anhui province – where prices have risen from RMB 800sq m to RMB1,400? They can't, hence an arrangement that provides for local implementation, allowing provincial governments to set some of the tax rates within Beijing's overall framework. The challenge is to implement local policies in a transparent manner – ideally, with lead-times that allow the market time to adjust without being subjected to a series of shocks and jolts. In the meantime, this is the new market.
Sam Crispin is our regular real estate columnist and can be contacted at firstname.lastname@example.org