2014-03-27 06:59:55
China s property prices appear to be falling again
Mar 22nd 2014 | HONG KONG | From the print edition
CAN bubbles ever pop twice? In late 2009 the world began to worry about a
Chinese property bubble, symbolised by Ordos, a newly built city, bereft of
citizens, in Inner Mongolia. In the spring of 2010 China s government broadened
its curbs on multiple home purchases and mortgage borrowing. The following
spring, prices in nine big cities fell at last, according to one widely watched
index. The Great Property Bubble Of China May Be Popping declared the Wall
Street Journal in June of that year.
This week the same newspaper cited compelling signs the Chinese property boom
is over, noting that Cassandras have been predicting a crash for years. (The
Cassandra of Greek myth could tell the future but was never believed. For China
s property Cassandras, things are the other way round: their direst
predictions are often believed, but have yet to come true.)
Bubbles often go on longer than expected. This newspaper warned about America s
internet and housing bubbles years before they burst. What is unusual about
China s bubble is not its persistence but its prevarication. It seems to be
bursting for a second time. Property prices did peak in 2011, as the Journal
noted. But the following year, they started to rise again.
Prices are still rising in 69 of the 70 cities tracked by the official
statistics (Wenzhou in Zhejiang province is the exception). But residential
sales fell by 5% in the first two months of the year, compared with a year
earlier. And other statistics paint a darker picture, points out Nomura, a
bank, which believes that property now poses a systemic risk to China s
economy.
Nomura (among others) calculates an alternative property-price index by
dividing the official figures for the value of housing sold nationwide (599
billion yuan, or $96 billion, in the first two months of 2014) by the
floorspace sold (94m square metres). That suggests the price per square metre
was about 6,400 yuan. By this (volatile) measure, prices fell by 3.8% compared
with a year earlier (see chart). That has not happened since February 2012.
Falling prices would be a natural outcome of China s frenetic pace of
homebuilding. China now has almost as much floorspace per person as Italy
enjoyed in 2009, Nomura calculates. GK Dragonomics, a consultancy, thinks China
needs to build roughly 10m homes a year to keep up with the growing size and
aspirations of the urban population (see article). Until 2011, China s annual
homebuilding was below that figure. In 2012, it surpassed it.
In most countries, that would be reported as good news. A rapid expansion of
the housing stock means fewer people living in the boondocks or in urban
discomfort. In China, however, this building frenzy is seen as an economic
threat, not a triumph. One fear is that China s developers are building houses
for the wrong people (speculators) in the wrong places (backwaters). Instead of
accommodating China s overcrowded urban masses, too many houses stand empty,
serving as stores of value for people dissatisfied with bank deposits and
distrustful of the stockmarket. Another fear is that if homebuilding falls
sharply, China may struggle to shift labour and capital quickly enough to avoid
an abrupt slowdown in the overall economy.
But the first fear should allay the second. China s building boom has left some
parts of the country with too much floorspace and other parts with too little.
Nearly half of all migrant workers still live in dormitories or on worksites.
Where housing is oversupplied, prices will have to fall, inflicting losses on
homeowners. But where housing needs remain unmet, scope remains for further
construction to fill the gap. For example, the government has said it will
spend more than 1 trillion yuan this year renovating shoddy housing. This will
help keep homebuilders busy.
Realignment of the industry will be painful for local developers that cannot
diversify across regions. These smaller firms have also suffered
disproportionately from the government s efforts to curb bank lending to the
sector. Cut off from banks, they have borrowed at punishing rates from less
regulated trust companies instead. Some went further. The biggest shareholder
of Zhejiang Xingrun, a property firm, was recently detained for illegal
fund-raising , local reports say. It has debts of 3.5 billion yuan ($565m) that
it seems unable to repay. It would not be the first property default in China.
But it would be one of the biggest.
Because China has misallocated housing, some parts of the country remain
overcrowded while others remain empty. A bubble is always bursting somewhere,
even as another inflates elsewhere. In China s patchwork housing market, the
Cassandras are never right everywhere but they are often right somewhere.