China’s Real Estate Market at Tipping Point, Analysts Say

November 22, 2011 Updated: December 1, 2011
Laborers work at a new property development under construction in Shanghai
Laborers work at a new property development under construction on the busy Nanjing Road shopping street in Shanghai, Oct. 9, 2011. China has invested heavily in property--about $750 billion in 2010 alone--since it privatised the market in the late 1990s, ending decades of state allocated housing and enabling a growing middle class to own their own homes. A massive stimulus package unveiled in late 2008 to combat the global financial crisis also funnelled a large portion into construction. (Mark Ralston/AFP/Getty Images)

China’s real estate market is going through its worst decline since the Chinese regime implemented a series of measures to curb rising home prices.

Shanghai-based economist Andy Xie (Xie Guozhong) told an audience at the Caixin Summit on Nov. 11 that China’s real estate bubble has now burst, as real estate developers have exhausted all avenues that could possibly loan money to them.

Xie predicted that many Chinese real estate companies will have to shut down in the coming months and also said that real estate is the root cause for many problems in China’s economy. The distorted real estate market has attracted many industrial entrepreneurs, who expanded their businesses in the hope of pursuing real estate ventures, he said.

In October, China’s home prices dropped in 34 of 70 Chinese cities from the previous month, as compared with 17 cities in September. The average month-on-month decline was 0.15 percent, the National Bureau of Statistics of China said on Nov. 18. This is the worst decline since authorities implemented a series of “tightening” measures earlier this year to reign in soaring home prices.

In the coastal manufacturing hub of Wenzhou City, Zhejiang Province, property prices dropped the most, with a 4.6 percent decline from September, more than 10 times the national average.

In the four “tier one” cities–Beijing, Shanghai, Guangzhou, and Shenzhen–prices fell after three months of stagnation.

Half of China’s new real estate tycoons were created in Shanghai during the real estate peak in 2009. Now they are in a crisis.

According to the 21st Century Business Herald, one of the developer tycoons just launched a sales promotion offering a price reduction of 7,000 yuan (US$1,000) per square meter, previously listed at 26,000 yuan per square meter, the largest price drop in Chinese real estate history. But sales were still slower than expected.

The article cited Shanghai senior real estate expert Chai Yifeng saying that the four biggest real estate tycoons in Shanghai are all facing sales and financing problems.

Real Estate analyst Shen Jianguang from the Hong Kong based Mizuho Securities Asia told Voice of America (VOA), “Price drops are not only happening to newly built homes in large cities, but also to existing properties in ‘tier two’ cities.”

Shen said he therefore believes that the “tipping point” of China’s housing market has arrived.

The Beijing Centaline Agency and Yang Hongxu, director of research at Shanghai E-House Real Estate Institute, concurred with this view.

Cheng Xu, a senior economist at Moody, told VOA that China’s real estate bubble has already formed, and bursting is only a matter of time.

“When we made the forecast a year ago that China’s real estate bubble will burst, we did a analysis of the cost of a regular 100 square meter (1,076 square feet) apartment in Beijing and a white-collar family income. Based on Moody’s calculation, the ratio was 40:1 for locations within the Fourth Ring in Beijing, and 25:1 for locations between the Fourth Ring and the Fifth Ring. Right before the real estate bubble burst in the U.S., San Francisco and New York City peaked the nation with a ratio of around 10:1. How would this be possible in China?”

Andy Xie commented on the regime’s “relief measures,” i.e. the 2008 stimulus package to save the economy. He said Chinese authorities should not take the old path of implementing relief measures again. Relief measures have a negative effect in the long run. It would once again prove that without bailout from the government or banks, China’s moneymaking model will collapse. Without breaking this model, there will be no hope for China’s economy, he said.

In March, Larry Lang, chair professor of Finance at the Chinese University of Hong Kong and famous TV host, said the real estate industry is the last pillar that supports China’s economy. Everywhere in China there is serious excess capacity in the economy, with the exception of the property market, which still showed strong demand. However, curbing the real estate market is like trying to prevent a volcano from erupting; it will eventually lead to “serious inflation, the economy bottoming out again, or even the eruption of the volcano, and eventually the collapse of the last pillar that supports China’s economy.”