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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.