Beijing faces precarious property balancing act
The Chinese government has increasingly clamped down on property prices via multiple policies over the past year. It appears to be having some success, but a key danger now is the possibility of tipping the sector into contraction. Elliot Wilson and Richard Morrow report.
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.
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.
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