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China Real Estate Falls Back to Earth China’s Sizzling Real Estate Market Cools
(about 2 hours later)
HONG KONG — After almost two decades of nearly unceasing increases in real estate prices and construction across China, one of the world’s longest-running bull markets finally seems to be stalling, with broad consequences for China’s economy and possibly its politics as well. HONG KONG — After almost two decades of nearly unceasing increases in real estate prices and construction across China, one of the world’s longest-running bull markets finally seems to be stalling, with broad consequences for the country’s economy and possibly its politics.
Housing starts plummeted 25 percent last month from a year ago, the Chinese government announced on Tuesday — a severe blow for a country in which residential real estate construction has come to account for one-ninth of all economic output. Prices are falling for both new and old apartments. The volume of deals is drying up. And developers are pulling back, furloughing workers and delaying new projects. In the latest sign, housing starts plummeted 25 percent in April from a year ago, the Chinese government announced on Tuesday.
Prices have begun falling for new apartments and old ones, and the volume of deals is drying up. The square footage of housing transactions slumped nearly 16 percent last month, as sellers were reluctant to accept the discounts that buyers increasingly demanded. It’s a severe blow for a country where real estate sales offices have become ubiquitous and tower cranes are jokingly described as the national bird.
Su Hua, a real estate broker in Shenzhen, had his highest commissions ever last year, as a speculative frenzy prompted families all over China to buy and sell apartments at a brisk pace. But he sat in a deserted office late last week with several silent phones on his desk. His income has halved so far this year.
The question is how much further the real estate market will slow, and whether its troubles will spill into other sectors of the economy, notably the banking system. Any weakness in the great Chinese economic engine could reverberate through the global markets.
“You can’t predict how the bursting of a Chinese real estate bubble plays out because it plays out in very small steps,” said Joel H. Rothstein, a partner in the Beijing office of the Paul Hastings law firm who specializes in Asian real estate.
China’s real estate market correction — some economists are even calling it the popping of a bubble — is partly the result of a deliberate decision by the country’s leaders in Beijing.China’s real estate market correction — some economists are even calling it the popping of a bubble — is partly the result of a deliberate decision by the country’s leaders in Beijing.
The Federal Reserve and other regulators in the United States did not try to pop the American housing bubble in the decade leading up to the market’s slump in 2008. The Federal Reserve and other regulators in the United States did not try to deflate what now seems to have been an American housing bubble in the years leading up to the 2008 downturn. But the Chinese leadership has been increasingly concerned over the last several years that housing prices were rising to unaffordable levels and that the economy was becoming overly dependent on investment; residential construction accounts for one-ninth of all economic output.
But the Chinese leadership has been increasingly concerned over the past several years that housing prices were rising to unaffordable levels and that the economy was becoming overly dependent on investment, and it has taken action.
The result has been a series of policies that includes punitive interest rates for mortgages on second homes, a ban on the purchase of third homes and, more recently, deliberate action by the central bank to keep short-term interest rates well above the rate of inflation. Zhou Xiaochuan, the governor of the central bank, the People’s Bank of China, reaffirmed tight credit policies on Saturday, saying that he did not think the economy was in sufficient trouble to justify monetary policy stimulus.The result has been a series of policies that includes punitive interest rates for mortgages on second homes, a ban on the purchase of third homes and, more recently, deliberate action by the central bank to keep short-term interest rates well above the rate of inflation. Zhou Xiaochuan, the governor of the central bank, the People’s Bank of China, reaffirmed tight credit policies on Saturday, saying that he did not think the economy was in sufficient trouble to justify monetary policy stimulus.
In a country where real estate sales offices have become ubiquitous and tower cranes are jokingly described as the national bird, the question is how much further the real estate market will slow, and whether its troubles will spill into other sectors of the economy, notably the banking system. But the real estate market continues to slump, which could prompt Beijing to take a different tack.
In addition to delaying new projects, developers have sharply reduced the speed at which they complete existing projects, furloughing workers and shipping minimal steel to building sites. Economic data released on Tuesday also included a deceleration in industrial production, with growth in steel and cement output slowing to a crawl. Retail sales also grew more slowly than expected in April, with the furniture market stalling as fewer families moved into new homes. Economic data released on Tuesday also included a deceleration in industrial production, with growth in steel and cement output slowing to a crawl. Retail sales also grew more slowly than expected in April, and the furniture market stalled as fewer families moved into new homes.
Su Hua, a real estate broker in Shenzhen, had his highest commissions ever last year, as a speculative frenzy prompted families all over China to buy and sell apartments at a brisk pace. But he sat in a deserted office late last week with several silent phones on his desk. According to Centaline, one of China’s largest real estate brokerage firms, transactions over the May 1 holiday weekend fell by half in Beijing and Shanghai from a year ago. The weekend is traditionally one of the two biggest real estate buying times of the year, along with a weeklong national holiday at the start of October.
His business has halved so far this year. More worrisome for him is that the drying-up of the market shows no sign of ending. Mr. Su, the real estate broker, worries that the market tumult shows no sign of ending. “There is not much else I know how to do,” Mr. Su said. “Maybe I will consider selling insurance on the side, if business continues to slow.”
According to Centaline, one of China’s largest real estate brokerage firms, transactions fell by half in Beijing and Shanghai from a year ago over the May 1 holiday weekend. The weekend is traditionally one of the two biggest real estate buying times of the year, along with a weeklong national holiday at the start of October. A handful of real estate restrictions are already being rescinded. In the last two weeks, state-controlled banks in Shenzhen, adjacent to Hong Kong, have stopped charging the extra half percentage point to one percentage point above the regulated national benchmark rate for mortgages. They had been charging extra in recent years, in an effort to discourage excess in the market.
“There is not much else I know how to do,” Mr. Su said. “Maybe I will consider selling insurance on the side, if business continues to slow.” But some experts wonder whether wealthy families will want to jump back into the market even if the most important restrictions, on the purchase of multiple apartments, are lifted. Nicole Wong, the head of property research at CLSA, a Hong Kong-based brokerage and investment firm, said that easing limits on overseas investment meant that more wealthy families were starting to send their money to Hong Kong and elsewhere instead of buying more apartments.
A handful of real estate restrictions are already being rescinded. State-controlled banks in Shenzhen, adjacent to Hong Kong, have in the past two weeks stopped charging the extra half percentage point to one percentage point above the regulated national benchmark rate for mortgages that they had been collecting in recent years.
But some experts question whether wealthy families will want to jump back into the real estate market even if the most important restrictions, on the purchase of multiple apartments, are lifted. Nicole Wong, the head of property research at CLSA, a Hong Kong-based brokerage and investment firm, said that easing limits on overseas investment meant that more wealthy families were starting to send their money to Hong Kong and beyond instead of buying ever more apartments.
For real estate prices, “even if you relax all the restrictions, it won’t make much of a difference,” she said. “The one thing that is certain is the direction is set, and it is down — but it can be managed.”For real estate prices, “even if you relax all the restrictions, it won’t make much of a difference,” she said. “The one thing that is certain is the direction is set, and it is down — but it can be managed.”
Chinese banking executives and economists say that a severe housing downturn would most likely cause a considerable increase in nonperforming loans at the country’s banks. But they make several arguments for why even a fairly steep slump in housing might not lead to bank failures or emergency bailouts of the sort seen in the United States when the American housing market slumped in 2008 and 2009. Chinese banking executives and economists say that a severe housing downturn would most likely cause a considerable increase in nonperforming loans at the country’s banks. But they make several arguments for why even a fairly steep slump in housing might not lead to the bank failures or emergency bailouts seen in the United States when its market soured.
The top reason cited is that even a fairly steep drop in the housing market would still leave the prices of most homes higher than the balance due on the mortgages on those homes. So almost nobody expects a big wave of foreclosures. A major reason is that a significant drop in the housing market would still leave the prices of most homes higher than the balance on the mortgages. So almost nobody expects a big wave of foreclosures.
The bulk of the homes in China were purchased more than five years ago, and real estate prices have about doubled in the past five years. Mortgage down payments range from 20 percent to 40 percent and are often higher, giving banks a larger cushion against losses. The bulk of the homes in China were bought more than five years ago, and real estate prices have about doubled in the last five years. Down payments range from 20 to 40 percent and are often higher, giving banks a larger cushion against any losses.
Chinese families also have one of the world’s highest saving rates — nearly half of income for urban households, compared with almost zero for American households. A bigger worry is the extent to which companies in other sectors have borrowed money from banks and trusts that they were supposed to invest in equipment purchases and other business activities, but have secretly speculated in real estate instead. Extensive anecdotal evidence suggests that such speculative activity by companies has been widespread.
A bigger worry, and harder for banking regulators to measure, lies in the extent to which companies in other sectors have borrowed money from banks and trusts that they were supposed to invest in equipment purchases and other business activities, but have secretly speculated in real estate instead. Other sectors of the Chinese economy are healthier than residential real estate, and could help sustain economic output. Infrastructure spending by the government, particularly railroad construction, is moving into high gear. And the central bank has gradually pushed down the renminbi against the dollar in currency markets this year, helping the competitiveness of Chinese goods.
Extensive anecdotal evidence suggests that such speculative activity by companies has been very widespread. But the losses may only become visible if there is a deep, sustained drop in real estate prices. But the trouble in the housing market has serious implications for consumers.A national survey released in March by the Southwestern University of Finance and Economics in Chengdu, China, found that households across the country had 66 percent of their assets in their homes, a figure that rises to 84 percent in Beijing. The comparable figure for the United States, where stocks and bonds are more popular, is 41 percent.
Extensive government control over the banks and many businesses may allow Beijing to slow, but not necessarily reverse, a slide in the real estate market. With so much wealth tied up in housing, concerns are rising about the potential for protests and other turbulence if real estate prices keep falling. A new crop of discounts adds to the nervousness.
“You can’t predict how the bursting of a Chinese real estate bubble plays out because it plays out in very small steps,” said Joel Rothstein, a partner specializing in Asian real estate in the Beijing office of the Paul Hastings law firm. Government and private sector statistics for real estate prices are inconsistent and hard to compare. But discounts of 10 to 20 percent from a year ago are increasingly common for homes sold between individuals, and for new units sold by developers as well, real estate executives said.
Other sectors of the Chinese economy are still healthier than residential real estate, and could help sustain household incomes and national economic output as the property market weakens. Infrastructure spending by the government, particularly railroad construction, is moving into high gear. And the central bank has gradually pushed down the renminbi against the dollar in currency markets this year, helping the competitiveness of Chinese goods in foreign markets. The chairman of a large developer with operations across China said that offering price discounts for the remaining units in half-sold projects was extremely difficult, because earlier buyers could protest and demand refunds equal to the discounts. The potential for protests, and not banking sector exposure to real estate, “is what concerns me,” said the developer, who spoke on the condition of anonymity.
The office and commercial real estate sectors are tiny in China compared with residential real estate and have shown wide variation among cities. Good locations and high-quality buildings in major cities like Beijing and Shanghai still attract many potential buyers, but single floors in office buildings in many second- or third-tier cities have fallen out of favor, said James Shepherd, the executive director of greater China research at Cushman & Wakefield, the global commercial real estate brokerage firm. But Winnie Y. Cheng, the research director at Centaline, said that many developers could not afford to hold apartments off the market indefinitely and were already cutting prices. Street protests have occurred, notably in Hangzhou, although earlier buyers have mostly accepted the discounts for later buyers, she said.
Government and private-sector statistics for real estate prices are inconsistent and hard to compare. But discounts of 10 percent to 20 percent from a year ago are increasingly common for homes sold between individuals, and increasingly for new units sold by developers as well, real estate executives said.
A bigger question lies in the potential for street protests and other turbulence if real estate prices keep falling. A national survey released in March by the Southwestern University of Finance and Economics in Chengdu, China, found that households across the country have 66 percent of their assets in their homes, a figure that rises to 84 percent in Beijing. The comparable figure for the United States, where stocks and bonds are more popular, is 41 percent.
The chairman of a large developer with operations across China said that offering price discounts for the remaining units in half-sold projects was extremely difficult, because earlier buyers could stage street protests demanding refunds equal to the discounts.
The potential for protests, and not banking sector exposure to real estate, “is what concerns me,” said the developer, who insisted on anonymity because of the sensitivity of the issue.
But Winnie Y. Cheng, the research director at Centaline, said that many developers could not afford to hold apartments off the market indefinitely and were already cutting prices. Street protests have occurred, notably in Hangzhou, but earlier buyers have mostly accepted the discounts for later buyers, she said.
These days, she added, “All of the developments are willing to cut their price.”These days, she added, “All of the developments are willing to cut their price.”