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China s property market - End of the golden era

China s property market is cooling off, at long last

May 31st 2014 | SHANGHAI

AFTER years of talking up China s gravity-defying property markets, local land

kings are now singing a darker tune. On May 26th Yu Liang, the president of

Vanke, China s biggest developer, declared that the golden era in which

everybody makes money out of property is gone. That came on the heels of

comments by Pan Shiyi, the boss of Soho China, another property firm, likening

the country s real-estate sector to the Titanic: It will soon hit an iceberg.

Official data show the country s property market is indeed coming down to

earth. During the first four months of this year, the value of residential

sales fell by nearly 10% versus a year ago, and construction activity on new

homes fell by a quarter. The decline on a month-to-month basis is even more

striking (see chart).

Why is the market losing steam? One explanation is that there is too much

building going on. Until recently this argument was dismissed by property

bulls, who pointed to wave upon wave of rural migrants moving to cities and

soaking up supply. Gavekal Dragonomics, a consultancy, estimates that China has

been at or near its sustainable level of peak supply of housing for many

months.

Cooling demand is another culprit. Despite a cultural affinity for property no

bachelor can hope to win over a desirable bride if he does not own a home it

seems that punters may now be ready to put off their purchases. After years of

double-digit growth, the economy is slowing. More importantly, recent price

cuts of a third or more being offered by developers in some markets have

started to worry would-be buyers. These bargains are now available in wealthy

coastal cities and not just in smaller cities in the boondocks.

Zhiwei Zhang of Nomura, an investment bank, acknowledges the problem of

structural oversupply but still believes that recent policy shifts are the main

factor. Pointing to a close correlation between property-market behaviour and

money supply, he says the market correction was triggered mainly by the

monetary-policy tightening that began in the middle of 2013.

Not everyone is worried. This is clearly the beginning of a downturn, the

third in eight years, but it is not a bubble bursting, insists Michael Spencer

of Deutsche Bank. Joe Zhou of Jones Lang LaSalle, a property-services firm,

points to previous weak periods near the end of 2011. In 2012 the central bank

cut the lending rate and nudged state-run banks to make mortgages more readily

available. Coming on top of price cuts, this led to a strong rally in sales

volumes and prices.

Some think the price cuts will lead to another market rebound. Others hope

policy easing will do the trick. Cities are starting to reverse previous bans

on owning multiple homes, for example, and the central bank has once again

recently encouraged banks to extend mortgages. Many big cities still enforce

policies to curb purchases, argue optimists, so there may yet be pent-up

demand. That is a theory that may soon come to be tested.