[photopress:property_luxury_building_boom_bust.jpg,full,alignright]BusinessWeek makes the suggestion that property investment is no longer the sure and certain road to riches in China.
Even after the private housing revolution of the mid-1990s, when many individuals bought flats at knock-down prices from their work units, property owners had no legal means of protecting their homes.
Last year’s property rights law supposedly changed all that and, according to the Chinese Academy of Social Sciences, a remarkable 80% of urban Chinese households now own their homes.
Property prices have risen rapidly. According to the latest figures, prices in the 70 major cities measured by the government’s property index are growing annually at around 11% although prices at the top end are rising much faster than that.
Two years ago, an apartment in Beijing’s Central Park, one of the capital’s smartest addresses, could be had for around US$2,000 per square meter. Now you would be lucky to get it for US$5,000, while the penthouse apartments cost over US$9,000.
High-end property developers, speculators and the banks that finance the deals have made a fortune, but there are signs that the easy money could be coming to an end.
Stricter controls on property speculation and land-hoarding and the government’s credit squeeze is already hitting developers.
In Beijing, strict loan quotas have succeeded in cutting off credit to all but a handful of the biggest and best-connected developers, which can now only secure loans priced at 10% above the nominal interest rate.
Bigger developers have also been hit by the global credit crunch, cancelling bond issuances as demand from foreign investors has dried up.
Shares in developers like Country Garden and Greentown are nearly 50% off their autumn peaks.
Rising inflation, higher interest rates and tumbling stocks are likely to make banks more cautious about their exposure to the property sector, which accounts for one-third of their loan books.
The banking regulator recently warned banks to step up controls on lending to developers amid fears that unsustainable property prices may trigger a rebound in bad loans. According to the Shanghai regulator, US$280 million in property loans went sour last year, twice the number in 2006.
China Construction Bank, the country’s biggest mortgage lender, reckons that a 10% drop in the market should cause no major problems, but a 20-30% drop would be very tough for the country’s still fragile banking sector to handle. And, there are some suggestions that it may come to that.