despite government measures to rein in the property market, the rapid slowdown that many predicted has yet to emerge. Housing prices in major Chinese cities have not seen a huge fall, with sales volumes actually picking up towards the end of the summer.
Residential real estate prices climbed 9.3% year-on-year in August, slowing from 10.3% in July, according to the National Bureau of Statistics. At the same time, housing transaction volumes rose in August: jumping 84% month-on-month in Shenzhen, while sales in Shanghai and Beijing rose by 31% and 23%, respectively.
The central government decided to step in after housing prices skyrocketed during the first quarter of 2010. The policy response was aimed at buyers and sellers, and included higher down payments and mortgage rates for second- and third-homebuyers and limits on purchases by non-residents.
Initially the moves seemed to have their desired effect. Price growth remains high when compared to the struggling market of a year ago, but on a month-on-month basis prices are flattening out. Several developers have already introduced price cuts on certain projects and others are expected to follow suit as they try to meet their ambitious full-year sales targets.
The fallout is unlikely to stretch much further – certainly not to the extent of the sharp price erosion that some analysts had predicted. This is because the tightening measures were only ever intended to deflate the market in those areas where it has become bloated. With real estate a pillar of the broader economy, the last thing Beijing wants to do is torpedo prices.
Although some officials have suggested that more must be done to rein in price growth, the government has learned its lessons from 2007 and early 2008 that using a heavy-handed approach can backfire.
Back then, the combination of a broad assault on down payments and mortgages (in contrast to the more focused increases now), taxes designed to slow home sales, restrictions on foreign investment and tighter monetary policy sent the market into a vicious downward spiral. Developers halted projects and the entire heavy industry supply chain – those responsible for the cement, steel and other materials used to build new homes – suffered.
The idea of a soft landing in China’s real estate market is encouraging because sharp swings have become so commonplace. Prices are forced upwards in part because individuals have few investment alternatives, in part because local governments are overly reliant on revenues from land sales, and in part because developers obtain capital so cheaply and easily. The government, forever concerned about affordability and social stability, then steps in to fix the problem.
One factor Beijing can’t constrain, however, is the fundamental belief that, in a land of uncertainty, real estate is perhaps the closest thing to a guarantee of strong returns that investors are likely to get. In the next 20-40 years China’s urbanization rate will climb from about 47% to 65-70%, meaning there will be no shortage of people looking to climb the property ladder.