Friday 24 October 2008

China's housing market - built on sand?

One chink of light on the horizon was that China would bail out the world with its continued growth (even at 8%). However, Chinese consumers are not immune. This is especially true if the housing market continues to fall.

The Economist summarise the position nicely.

What goes up [Economist]


For several years China’s leaders have been trying gently to deflate a housing-market bubble pumped up by huge demand from a fast-growing middle class with few other investment opportunities. In the past few months their efforts have begun to pay off. But economic growth has also begun to slow, the stockmarket is far below last year’s peak and worries are growing about the impact of the global financial crisis. Weaned in unremitting good times, China’s fledgling middle class, whose support the Communist Party sees as crucial, is entering uncharted territory.


Numerous other property companies around China are similarly beleaguered. The Chinese press says that in September around 100 homeowners in the eastern city of Hangzhou stormed into the offices of Vanke, a big developer, to demand compensation for falling prices. In March a company in the southern city of Shenzhen (pictured above) caused a stir after it cut prices by 20%, by coughing up the difference to about 25 previous buyers of its property. Others have resisted giving cash, but have tried to calm homeowners by offering discounts on management services.

The official press has shown little sympathy for the homeowners’ demands. Taming the housing market has long been a central-government objective. Even so, many local governments are now deeply worried about the downturn. By the second quarter of this year, prices were falling in more than a dozen big and medium-sized cities. Property-related activity makes up a considerable chunk of local governments’ revenue and, as Yi Xianrong of the Chinese Academy of Social Sciences points out, helps to line officials’ pockets.

In recent weeks 18 cities, including Hangzhou and Shanghai, have introduced measures to prop up the market. These include cuts in transaction taxes and even subsidies for homebuyers. Hangzhou has made it easier for rural dwellers who buy homes in the city to obtain urban-residence certificates. These confer access to subsidised education and better health care than in the countryside. Shenzhen, where house-price falls have been among the country’s biggest (see chart), has so far resisted the temptation to intervene. So has Beijing, where the number of residential properties sold during the weeklong national-day holiday earlier this month—usually a brisk period for sales—was down by 72% compared with the holiday in 2007.

For all the grumbling of homeowners wrong-footed by the market’s plunge, the central government is still mindful that a large proportion of middle- and lower-income households have been complaining bitterly about the fast rise in house prices in recent years. This group has a bit of clout too. Since they came to power six years ago, the present bunch of China’s top leaders have been trying to present themselves as more “pro-poor” than those in charge when the country launched its sweeping privatisation of urban housing in 1998 (a move that marked the birth of China’s middle class).


The State Council called for the construction of government-subsidised housing to be stepped up. This could help stimulate economic growth, about which the government is showing signs of concern. On October 20th the National Bureau of Statistics said that GDP grew in the third quarter by 9%. This was lower than many had expected and the first time in four years a quarterly growth figure was in single digits. One Chinese newspaper said the government was considering the launch of a trillion-yuan fund to help build affordable homes. A bigger supply of cheap housing is hardly likely to boost prices.

Growing demand for homes in the cities, on the other hand, certainly will help. The government wants to move many tens of millions of rural residents into urban areas in the coming decade. Andy Rothman of CLSA, an investment-banking firm, argues in a research note that with household debt “almost non-existent” and state-owned banks ready to lend, buyers will return to the market as the dampening measures are eased. And to keep artificially depressing the housing market, he notes, would anger the middle-class homeowners the party has been cultivating: not a risk China’s leaders are likely to take.


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