June 16,2009

Real Estate Market Rebounding, But Rising Prices May Stifle Demand

By Niu Zhijing, Shanghai

Real estate market bubbles may be emerging in China’s major cities, and it’s anybody’s guess whether the industry rebound that started early in 2009 will see out the year.
National Bureau of Statistics figures from the first five months this year show sales of residential commercial housing in China up 25.5%, year on year, and sales income up 45.3%, over the same period of last year. With the high sales volume in March, April, and May, total sales even exceeded that in the same period of 2007.

In some provinces, developers are raising housing prices. According to the China Index Research Institute, prices in May in 17 of China’s 30 major cities rose more than 10% over the previous month, the highest in Hangzhou, at 55.65%, and Tianjin at 22.22%.

On June 9, China Citic Bank and its Spanish strategic investor BBVA jointly released a report saying housing prices in Beijing had risen 16%, in Shanghai 18%, and in Shenzhen 20% higher than the current general equilibrium price.
Housing prices are increasing mainly because of loosened regulatory policies over land, finance, and taxes in the real estate market, and the demand produced by China’s quick urbanization. The "sheep flock" effect among housing buyers is also playing a role.
A number of analysts, though, regard the current boom as a false one. Cao Jianhai, an expert with Chinese Academy of Social Sciences, said the housing price hike was led by easy credit, with companies and individuals investing in housing because of fears over inflation. Real estate investors have again become active two years after the government began to regulate the housing market.
"I think 50% of the sales figures in China and 20% of the total loans are speculative. The adjustment period for housing prices will be prolonged and putting cash in now may lead to malicious inflation," Cao says.

Some housing buyers seeking fire sales admit that housing is a primary choice for investors with good sense, as happened during last economic circle. Then, the domestic economy had adequate liquidity and raw material prices were rebounding quickly. "When inflation is approaching, the housing and stock markets boom."
There is no telling how long such a "boom" will last, but nobody has any right to be optimistic. According to Vanke, China’s leading real estate developer, the changes in housing prices indicate the rebound of the market’s confidence, but too rapid price growth will stymie demand and bring uncertainties to the market. For developers, stable and rational housing prices are better for a steady rebound of the industry.
Slowdowns have already occurred in the sales of some housing projects in Shanghai since the beginning of June, where buyers are again adopting a wait-and-see attitude. This round of price hikes may depend on the policy trend of the Chinese government. If it maintains the current monetary policy, froth is sure to continue to form.

According to a central bank survey in the latter half of May, in 50 cities over 60% of residents surveyed thought current housing prices "too high to accept." Residents planning to buy housing in the coming three months account for 15.8% of the total, 0.9 percentage points lower than the previous quarter.


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