Property price slide a China success

By Olivia Chung

New-home buyers in China's most prosperous cities along with leading developers such as China Vanke are, like their counterparts in the US, feeling the pain as property values tumble below their purchase price and sales slow.

But where the US government is seeking to alleviate the distress of its citizens by encouraging mortgage payment rescheduling and other measures, the authorities in Beijing can congratulate themselves for engineering the price slide in urban centers such as Shanghai, Shenzhen and the capital itself.

Shenzhen, a fast-growing modern metropolis bordering Hong Kong, leads the country in terms of falling values and declining transaction numbers for new homes, as government measures taken over the past two years to cool what was seen as a dangerously overheated property market have started to make an impact.

The government last September raised the cost of second-home mortgages, increasing the down-payment ratio for such loans to 40% from 30% and setting the mortgage rate for the loans at 1.1 times the People’s Bank of China’s base lending rate.

Further tightening measures will probably follow before the year end, said First Shanghai Securities strategist Linus Yip.

The average price of new homes in Shenzhen fell 36% from their peak of 17,350 yuan (US$2,540) per square meter last October to 11,014 yuan per sqm in May, according to the city's municipal bureau of land resources and housing management. That's in sharp contrast to the 65% price surge in just the first six months of 2007.

Prices in Shenzhen, a city of more than 12 million people, could fall a further 10%-15% over the next 12 months, said Citic Ka Wah Bank chief economist Liao Qun, who forecast similar further falls in Guangzhou and declines of up to 10% in Beijing and Shanghai.

New-home transactions dropped 46% in Beijing in the year to May, slid 31% in Guangzhou, just north of Shenzhen, and fell more than 16% in Shanghai, Liao said.

Shenzhen has been the worst hit of key cities as its real-estate market had shown the most rapid growth, mainly driven by speculation, since early 2005, while expansion of the market in other cities had been relatively steady, Liao said.

At the same time, and "in contrast to the weakness of market demand, market supply is accelerating as a result of the excessive growth in real estate investment in the past years," he said.

That oversupply is hitting companies such as China Vanke, the country's largest publicly traded property developer. Its shares, which trade in the Shenzhen stock market, have crashed about 64% since last November 1, outpacing a 41% drop in the local benchmark A-share index. They are down about 23% from last June.

Vanke, in a statement filed to the Shenzhen Stock Exchange this month, said it made 19.76 billion yuan in sales in the first five months this year, or only 35% of last year’s total sales.

Poly Real Estate Group, the country’s second-largest property company, recorded sales of 6.65 billion yuan in the first five months, accounting for only 27.7% of the company’s full-year sales target.

Away from main cities, property prices continue to rise, albeit in June at the slowest pace in 10 months, Bloomberg reported this week, citing National Development and Reform Commission data published on the economic planning agency's website. Property prices in 70 major cities increased by 8.2% from a year earlier last month, one percentage point slower than in May, the report said.

"Property prices are still rising in most cities and have only shown substantial declines in Shenzhen, Guangzhou and other cities in the Pearl River Delta," Liao said. "Based on previous experience during 2003-2006, when property prices rebounded strongly after a short break in response to a tightening measure, it is likely the government is now targeting a deeper price adjustment this time around, or will at least prefer to see prices stabilize at current levels for a longer time."

The fall in values is forcing many owners such as Shenzhen white-collar worker Zhang Hong to consider whether to maintain mortgage payments. Zhang bought an apartment in the city's Nanshan district for about 800,000 yuan in mid-2007. It is now worth about 600,000 yuan.

"A few times, I have considered giving up my apartment, with the the price decreases exceeding my [150,000 yuan] down payment," he said. "But I need the flat, which is the only place for my family to live, and I have no other choice."

Other owners are walking away from their debt, prompting denials of rumors that bad loans held by banks are rising steeply. Bad loans increased 0.02% in the first five months this year to 11 million yuan in May, according to a Shenzhen Economic Daily report. The report cited an unnamed manager in charge of a bank’s mortgage division who rejected as "ridiculous" a rumor circulating on the Internet that banks locally had more than 100 billion yuan of bad loans related to the property market.

Speculators are stopping their mortgage payments after facing the prospect of substantial losses, the Nandu Weekly reported.

The city’s commercial banks have a total of only 220 billion yuan in mortgage assets, and bad loans accounted for only 0.67% of the total volume, the Shenzhen Economic Daily report said.

Olivia Chung is a senior Asia Times Online reporter.

www.atimes.com/atimes/China_Business/JG18Cb01.html