Wu Xing sits down heavily in a Beijing teahouse and sighs. His quandary is simple: he earns good wages – US$11,000 a year – but he can’t afford to buy an apartment in the Chinese capital. Instead his girlfriend lives with her parents while he shares a tiny communal apartment with seven other Chinese white-collar workers in Tongzhou, a spillover suburb east of Beijing. His average daily commute is three hours.
Little wonder that Wu is, as he admits, “tired and grumpy most of the time”.
But for Wu and millions of Chinese workers not born into privilege a measure of salvation may be at hand. At long last, after two decades of almost perpetual growth, residential property prices appear to be flattening out.
According to the China Real Estate Index System, a monthly survey of property developers and real-estate agencies, prices in the country’s 100 largest cities edged up just 0.07% month on month in August, slowing from a 0.21% rise the previous month.
Forty-four cities posted a mean fall in prices, up from 33 the previous month. And in China’s first-tier cities, including Beijing, Shanghai and Guangzhou, prices dipped by an average of 0.41% in August over July figures, the first month-on-month fall in nearly a year.
Official statistics (never a reliable source of information in China) appear to be backed up by professional and anecdotal evidence. Michael Kilbaner, China head of research at real-estate services giant Jones Lang Lasalle (JLL), says housing transactions in Shanghai and Beijing have been “massively reduced”. He adds: “We believe [we have] seen some price decreases in Beijing.”
For China’s ultra-cautious government, these statistics matter. Government-run news wire Xinhua trumpeted the success of a “slew of measures” adopted in early 2011 to contain “rapidly rising real-estate prices”.
Yet the state’s attempts to rein in the property market remain at a tipping point. Triumphalism right now would be premature.
The government appears to understand this. On September 1, Premier Wen Jiabao stated in Qiushi, a Party magazine, that the property market was at a “critical stage”, with prices continuing to surge in second- and third-tier cities, towns where the private residential real-estate sector has only just begun to develop.
“We must unswervingly curb irrational housing demand, continue to strictly implement differential housing loans, tax policies and restriction on purchases,” Wen wrote. He also emphasised the need to return to “reasonable” house prices.
This shift toward smaller or less economically important (lower-tier) cities makes sense to many. Housing prices in these cities rose 4.4% year on year in July and by 0.09% over June data, according to figures from CCB International Securities (CCBIS).
Beijing’s fear is that property investors are simply switching their attention to lower-tier cities, driving local aspiring buyers out of those markets too.
“The government still views property prices as being too high,” says Banny Lam, head of global economic research at CCBIS. “For second- and third-tier cities, prices are still too high, so that is why I expect the government to impose additional tightening measures.”
Property prices may have flattened out in the short term, but Beijing’s concerns remain high. Its key challenge is to keep prices as they are, without tipping this critical sector into contraction.
Seeking stability
In some senses, the rise in property is due to China being unprepared for the level of its own success. There are a lot of increasingly wealthy people in the country, and they lack enough onshore investment options. So they’ve ended up pouring a lot of their cash into real estate.
The Party fears that this investment bubble will force would-be buyers out of the market. This worry gnaws at them incessantly, and it underlies many of their policies.
Stability is everything for a government whose own security rests on boosting income and raising living conditions for its people.
When property prices are rising uncontrollably, they eat not just into people’s income and wealth but also their desire to buy and consume. And there is nothing Beijing wants more than to develop a vibrant economy based on internally driven domestic consumption (something it does not currently have).
Hence the need to rein in real-estate prices. This has occurred in three steady phases. Stage one began on April 17, 2010, when the State Council, China’s cabinet, identified places where prices had risen too steeply (first-tier cities notably) and ordered commercial banks not to grant mortgages to non-residents or third-home buyers in those areas.
Then on September 29 came a central government decree widening the scope of the programme to include more cities, while raising downpayments for first-time buyers to 30%. Finally, on January 26 this year, the State Council extended the purchase restrictions to 35 cities and raised downpayments for those buying second homes from 50% to 60%.
Mortgage costs, in turn, are increasing, as a direct result of four separate increases in the benchmark rate of interest in the six months to April 2011. Those moves, pushed through in an attempt to curb inflation, also raised the mortgage rate from 4.3% in October 2010 to 6.8% in June.
All evidence points to the likelihood that Beijing will now seek to extend this programme to include all cities across the mainland in an attempt to rein in unnecessary speculation.
The world’s most important sector
Yet what impact will this really have? For sure, the government doesn’t actively want prices to fall. This, notes one respected China commentator, would be “political and financial suicide”.
He adds: ‘The objectives made clear by the government are in terms of controlling purchases, but in my view their long-term goal is for moderate price growth. I don’t think any government anywhere has ever deliberately wanted house prices to fall.”
Rather, he says, they are seeking to create a “healthy rate of construction, investment, and price growth”.
In the rush of stories surrounding China’s property boom, it’s often overlooked how vital this sector has become to broader global economic growth. A decade-long boom in mainland construction has raised demand for natural resources such as iron ore (used in building steel property structures) and copper (used to build telecommunications and electrification wiring) through the roof.
Chief Asia-Pacific economist at UBS Jonathan Anderson has described Chinese property as the “single most important sector in the entire global economy”.
So with the US facing an uncertain future and Europe teetering on the edge of a double-dip recession, China’s efforts to rein in a sector that is driving global growth may hardly have been more ill-timed.
Yet China isn’t going to tinker with its plans just to mollify critics in Brussels or Washington – it almost never bows to foreign pressure – or to placate a few natural resource giants listed in Sydney, London and Toronto.
For now, property prices appear to be under control, and some analysts believe that the government has a good handle on the market, at last.
“China’s housing market is clearly in much better health than during the last global economic downturn,” says Andy Rothman, chief China macro strategist at CLSA.
Adds JLL’s Kilbaner: “We would characterise the current real-estate regime as being more coherent than previous regimes we have seen.”
A calculated risk
Yet there are losers in this long, drawn-out process, as well as a coterie of uncertainties. In seeking to slow a juggernaut of an industry to a virtual crawl in under a year, China is taking an awful risk.
The fact is that no one knows how this sudden slowdown in a key industry will affect either the real-estate sector or the economy as a whole. After all, property construction accounted for around 15% of the country’s gross domestic product in 2010.
This is not a small industry, and with millions of Chinese moving to cities every year in one of the greatest rural-urban emigrations in history, authorities can ill afford to choke off supply as well as demand, or to temper demand indefinitely.
“What I think people fail to appreciate,” says JLL’s Kilbaner, is “how much of the economy is tied to residential real estate.”
This includes not just the commodities that go into making a property structure, but the services that surround that edifice – real-estate services, mortgage financing, the lighting and goods and furniture that fill the finished apartment, and the utilities that deliver electricity and water.
Beijing seems to be hoping that any fall-off in property development in the private sector will be offset by its plans to build a vast, socialised housing sector, in all likelihood mirrored on the giant (and rarely acknowledged) social housing projects of Hong Kong and Singapore.
As China urbanises, with up to 200 million people expected to move to leading cities over the next 20 years, it is likely to need a two-speed real-estate system.
One, a privately run system, will act as the industry does in any free economy, allowing homeowners to buy and sell property as determined by existing laws and the availability of capital and housing stock.
The second will be a vast, social housing system, given to poorer urban residents and workers flooding in from the fields. It is this industry that China is seeking to accelerate, at the expense of an investable private property sector, in order to make housing available to all.
Thus, its restrictions on new property have two tacit and interlocking benefits. It tamps down demand for new property among those with wealth (making some property more available to lower-earning residents as prices flatten out and possibly fall). And it forces property developers, particularly larger ones, to focus on the construction of social housing.
“The government is suppressing demand [in the private sector] in order to address the need [to build more] social housing,” says JJL’s Kilbaner.
Seasonal shifts?
Yet for all the positive signs of property prices easing, there remains a reasonable chance here that the cart is being placed before the horse.
Slower property demand and flattening prices in leading cities during the summer months is one thing. But there is a possibility that prices will rise again going into September and October, the prime property-buying season in the mainland.
Many believe, though, that prices will continue to top out, and even stagnate. CCBIS’s Lam tips prices to remain flat in first-tier cities for the coming months (and perhaps longer), with prices in lower-tier cities also slowing, and even coming to a dead halt in late 2011 and early 2012. But that is all theory.
Rarely does China put itself in a position to fail, particularly over something as vital and complex as the property market. So if it is announced, on October 1, that September property prices rose across the board after a summer lull, from third-tier cities such as Nanchong right up to first-tier municipalities like Beijing and Shanghai – then the Party will really start to sweat.