In contrast to the blistering summer heat outside, the languid sales campaign inside the air-conditioned hall reflects a chill that is spreading across China’s real estate market.
The government’s nearly 20-month tightening campaign has resulted in growing inventories of unsold homes and higher mortgage costs — all in a delicate attempt to avoid a property bubble and guide red-hot home prices lower without causing the market to implode and destabilize the economy.
“We will not cut prices in the next six months,” boldly proclaims Cui Fan, a sales agent from Jingxu Real Estate Development Co, which offers non-furnished residences more than an hour from downtown Beijing at 19,000 yuan, or nearly $3,000, per square meter.
Really?
While such bravado was rewarded in the past when the property market seemed to only go in one direction, many analysts are starting to question that assumption, and increasing numbers of would-be home buyers are perched on the sidelines, hoping prices will fall.
“Most developers agree that cutting prices is the trend. They just need to decide the right extent and catch the best timing,” said Sunny Liu, a director at the China Index Academy, serving developers and institutional real estate investors.
Banks’ clampdown on lending, part of Beijing’s tightening of monetary conditions to rein in inflation, as well as a surging supply of so-called affordable housing for low-wage earners will push prices downward, he said.
He’s not alone in his outlook.
Six of eight property analysts polled by Reuters in the past two weeks expect prices to fall during the rest of the year. Five of them expect a drop of less than 10 percent, with only one predicting larger declines up to 20 percent. The other two forecast prices could actually rise further, by another 5 percent.
A sharp price slump is seen as unlikely for now given overall demand is still strong, fueled by massive migration from rural areas to cities, and bank deposit rates remain relatively low.
Banks’ own stress tests in 2010 showed they can withstand a home price fall of up to 50 percent, which would only result in a rise in non-performing loan ratios of a few percentage points, though some economists are skeptical that those tests were rigorous enough.
To be sure, China’s real estate market has consistently defied earlier prognostications of a crash or even a pullback. What’s different this time around, some analysts say, is that a string of negative factors is finally coming together that could stall or reverse the relentless climb in home prices.
As Beijing gradually turns the monetary tightening screws, some banks have stopped issuing mortgages altogether, preferring lending that can fetch much higher interest rates.
On top of that, three official interest rate rises so far this year have pushed mortgage rates to a three-year high of more than 7 percent. And then last week, Beijing announced the extension of harsh buying restrictions to dozens of smaller cities.
“The property market correction will deepen,” Zhao Qiang, Shen Aiqing and Xu Junping, analysts with GF Securities, predicted in a research note. “The current stalemate will be broken and prices will start to fall in the third quarter.”
They contend that as Beijing remains fixated on fighting inflation, which hit a three-year-high in June, the property market will be squeezed and prices may start to fall.
Lily Chen, a newly married office worker in Shanghai, is typical of potential home buyers who have been priced out of the current market and forced to rent.
“We’ll wait. Prices are not coming down yet and mortgage rates are too high,” she said. Record home prices are forcing more and more Chinese young couples to accept the unhappy condition of “luo hun,” marrying without a home, something that in the past was unacceptable.
Across the country, home prices either hover at record levels or are climbing, with declines in only a few cities. Average new home prices rose 4.2 percent in June from a year earlier, according to Reuters calculations.
In month-on-month terms, however, prices grew at a slower pace. Those locked out of the market think last week’s policy move, extending purchase restrictions to smaller cities, may serve as the last straw for a market already burdened by slackening sales, rising supply and insufficient loans, forcing developers to trim prices.
Credit quota limits — meaning a short supply of loans amid strong demand — have enabled banks to tighten even beyond regulatory requirements. Some have suspended mortgage lending, some charge higher rates and others ask for extra fees or large supplemental deposits from loan applicants. “You can hardly get discount mortgage rates these days in Beijing,” confirms Liu Jia, a loan officer from Bank of Beijing, a mid-sized lender.
It took Kevin Hou, a self-employed businessman, about half a year to get a loan to buy his second home in Beijing, compared with a month or so the previous time. Official data shows mortgage loans have been falling every month this year compared with the year-ago periods, while bank loans to the whole real estate sector, including those to developers, have been growing at single-digit rates, down from annual rises of 20-percent-plus last year.
Crunch time may come in the autumn. Many developers are pinning their hopes on the golden season of September and October, when property sales typically rebound, and have suspended some launches until then. But the tactic may backfire this year, some analysts suggest, since the market is already glutted and developers are all focused on the same strategy. The numbers support their view, to a degree. In the second quarter, the volume of property sales in key cities including Beijing and Shenzhen fell by more than a third from the first three months, leaving a massive amount of inventory that could take more than 10 months to sell down. The one bright spot in the market — smaller cities — helped propel nationwide property sales, in terms of floor space, up 13 percent in the first half from the previous year. But Beijing’s latest policy move targets just those smaller-tier cities and could now choke off that growth. Besides the 42 cities which are already capping property transactions, the latest measures will hit satellite cities around large metropolitan areas, cities with natural resources and those near high-speed train stations, according to Credit Suisse property analysts Jinsong Du, Wenhan Chen and Duo Chen. But are developers feeling the pinch? “The whole industry faces a tight cash problem as loans are difficult to get and sales are not satisfactory,” said Wang Yi, a senior executive of the mid-sized developer Beijing Capital Development.
“We will give project companies more flexibility in pricing,” he told Reuters. In other words, long-awaited price cuts.
