Chongqing is better known for its spicy hotpot than its real estate, but there are signs of a rise in the west as property markets prepare to ride on the coattails of expanding trade in the region. The city's recent past has not been so glorious: it was bombed in wartime and effectively starved of central government investment pending the outcome of the Three Gorges Dam project, which was 50 years in the making. Chongqing has come alive in recent years, though, and its location, perched on the rocky banks of the Yangtze, lends the terrain a more interesting character than many of China's other distinctly fiat cities. With a total municipal population of more than 31 million – and a further 170 million people in the surrounding hinterland, Chongqing offers both a large and reasonably priced labor pool to manufacturers and has already become China's third-largest auto producer.
The government is pumping millions into developing western China's infrastructure in a bid to attract more business and alleviate the east-west poverty gap. The thinking is, if these workers develop into fully-fledged consumers, the west will become the place to be – and the wealth is already beginning to radiate from Chongqing.
Property transaction volume in the city increased by more than 28% from June to July and prices rose 4%. Yet roughly 75% of properties on offer cost less than RMB3,000 per sqm. For RMB16,000 per sqm, you can buy a luxury garden villa, while a smart apartment in Chongqing's North Zone will cost around half that.
Given that property prices are comparable to those in Shanghai five years ago and locals say the city is 10 years behind its east coast counterpart economically, those who buy now may find they are sitting on a handsome profit by 2010.
Shanghai itself has seen major fluctuations in its market since the beginning of the year, and despite some recent sales successes, many investors have reduced their exposure to the real estate market since the tightening policies were introduced in March.
In addition to the capital gains tax, ban of pre-completion sales and restriction of land use rights that were rolled out in many cities, Shanghai also sought to reduce speculation by requiring homeowners to pay off their existing mortgages before selling their properties.
This, together with an increase in the floor lending rate for housing loans as well as a 10% rise in the down payments required to obtain these loans, has resulted in a significant drop in transaction volume and a smaller drop in prices. This suggests further price falls may be on the way.
Shanghai vs. Beijing
In contrast, prices have not ramped up in Beijing and Guangzhou where there has been much greater stability in response to the new tax regime. The Beijing market has been comparatively steady, partly due to the smaller number of investors there than in Shanghai. Beijing has seen both rises and falls since 2000, while prices in Shanghai have been upward only, the most significant increases taking place post-2002.
These differences in price movement speak volumes about the contrasting character of Beijingers and Shanghainese. While in Shanghai, news of money-making properties spreads far and wide and encourages more investors to jump in, Beijingers tend to be more blase and skeptical about such stories. Shanghai has also proved more accessible to Zhejiang and Jiangsu buyers, and of course more consumer-friendly when it comes to mortgage applications and resale.
Prime apartments in Beijing sell for RMB18,000 to RMB20,000 per sqm but there is plenty of choice at lower prices too and rental returns are good. What Beijing lacks is an effective secondary market and ready financing, and this limits price increases. Cash buyers can mop up secondary market units and wait for price increases when financing is easier and there is greater liquidity. The trouble is no one knows when this time will come.
As would be expected, residential prices in Guangzhou exceed the national average but prices are more in line with affordability than in Shanghai. The average property price has actually fallen to RMB5,616 from RMB6,616 in 1997, suggesting a balance between supply and demand.
This also supports the theory that the tightening policies will continue to have relatively little impact on the Guangzhou real estate market compared to Shanghai.
Stability in the north and south, along side signs of a renaissance in the west, could prove a healthy option for those ready to take a punt on less buoyant markets than Shanghai. But it may be a long wait before these investments bear fruit.
The foregoing opinions are those of Sam Crispin.