Chinese property boom falters, but crash unlikely

Font Size

Print

Feedback

Email

Discuss

Related Articles

Realty firms on hiring spree againDLF profit crumbles 77%Realty demand up 15% in Q2‘Property rates to fall 25% in 12-15 months’

Shanghai, Dec 20 : Wang Zhiyong, a 34-year-old salesman of credit card billing equipment, regrets paying 1.2 million yuan ($163,000) in August for a one-bedroom apartment near Shanghai's downtown area.

He rents out the 46 square metre (495 square foot) apartment, and estimates that gives him a 3.5% annual return. But the bank charges him 7.83% a year on his 20-year mortgage, and interest rates look set to rise further given high inflation. "The investment doesn't make sense if property prices stop rising," said Wang, who is father of a three-year-old son and spent most of his family's savings buying the apartment.

Eight years into a boom that has tripled home prices in major cities such as Shanghai and Beijing -- and pushed them up much faster in downtown areas -- China's red-hot property market is showing signs of flagging. High prices, rising interest rates and a government drive to cool speculation are dampening the market. Many Chinese bought property several years ago partly because of talk that preparations for the 2008 Beijing Olympics would boost prices in the capital and other cities -- so now that the Olympics are near, some fear a crash may be looming.

But most experts still insist prices won't collapse, and that a repeat of the U.S. subprime mortgage crisis, where the pricking of a property bubble was worsened by problems with financial derivatives that aren't used in China, is not on the cards. While bubbles in China's priciest urban districts may burst, rising incomes, land shortages and the migration of millions of people to cities will support prices in most places, they argue. "Prices are falling only in several cities where speculation has been rampant," said Cao Xute, analyst at Sinolink Securities. "Prices in cities such as Shanghai and Beijing are still mostly underpinned by strong demand from consumers." Property jitters began rising a few weeks ago with news from China's prosperous southern cities. In Guangzhou, new home prices slid 10 % in November after apparently peaking in October, the local Land, Resources & Housing Administrative Bureau said. In Shenzhen, prices sank as much as 20 % in some cases, local media reported, though no official data is available.

The jitters spread to the stock market with shares in Vanke, the biggest listed developer, tumbling 18% over seven days to a four-month low of 26.60 yuan on Tuesday. It also fuelled a slide in bank shares, threatening to create a vicious cycle between the property and stock markets.

Official data shows bad property loans at some banks started rising in the second half of this year, and they could climb sharply next year if the property market slips.

For example, outstanding non-performing property loans at Guangdong Development Bank, in which Citigroup Inc has a major stake, rose by more than 1 billion yuan ($142 million) in January-October. There are worries that slumping bank shares could in turn drag down the stock market, where many people have been making profits that they invest in property.

In the past three months, Beijing has taken a series of steps to cool speculation in the property market including higher downpayment requirements for second homes, restrictions on lending to developers, and closer scrutiny of mortgage borrowers. A member of the central bank's monetary policy committee, Fan Gang, has even suggested China introduce a general tax on holders of residential property. It's unclear if that might happen, but the suggestion was enough to deter some buyers.

Nevertheless, most analysts think the market will escape disaster. The official Xinhua news agency reported urban home prices in general were up 10.5 % from a year earlier in November, and the government's "property outlook index", designed to indicate future strength in the market, climbed.