Property bubbles are finally showing signs of deflating

PUBLISHED : Monday, 21 November, 2011, 12:00am
UPDATED : Monday, 21 November, 2011, 12:00am


After nearly 20 months of unusually harsh monetary tightening and administrative measures, the mainland's real-estate bubbles are finally showing signs of losing air. For most analysts and officials, it is only a matter of time before the bursting is heard, and before we see how much property prices fall, with some predicting they will drop between 15 and 30 per cent in the next six to nine months.

The central government should be commended for resisting pressure from the property developers and their representatives in the form of economists, local officials and official think tanks issuing dire warnings on the potential effect of the real-estate slowdown on the broader economy.

This month, Premier Wen Jiabao dashed the final hopes of property developers by stating in very clear terms that the central government had no intention of loosening the current property policies, even though it was prepared to 'fine-tune' its macroeconomic controls.

Indeed, as much of the mainland is bracing for a sharp drop in temperature, developers are appropriately lamenting that the whole property sector is headed for a long winter, without knowing when or how it will end.

Over the past 19 months, the central government has aggressively pushed up interest rates and set limits on bank lending for both the property developers and buyers. To deter speculators, the government has ordered banks to limit the number of mortgages for each property buyer, and has raised the required down payments to as much as 50 per cent. Most of the bigger cities have introduced measures to make it harder for non-residents and foreigners to buy residential properties, and the government has also introduced an experiment on collecting property taxes in Chongqing and Shanghai.

But those policies started showing noticeable effects in cooling down property prices only in the past two months. While there are a number of explanations for why it took so long for the policies to take effect, one major reason is that developers initially refused to lower prices, betting on the central government blinking first, just as in 2008. At that time, when the government's tight monetary policies were just about to deflate the property bubble and many developers were on the verge of collapsing, the central government, worried about the impact of the global financial crisis on the mainland economy, opened the floodgates of easy money by launching a 4 trillion yuan (HK$4.89 trillion) stimulus package, with a considerable amount flowing to the real-estate sector, further boosting property prices and fattening the pockets of developers, allowing them to resist the government curbs for a long time.

Over the past two months, however, there have been concrete signs that the hot property sector has finally run out of steam. According to Xinhua reports last week, a growing number of government-sponsored land auctions in Jinan , Nanjing and Chengdu have seen land lots either unsold or sold at the minimum prices.

On Friday, an indicator measuring the price of new residential projects in the 70 big and medium-sized cities for the first time showed a month-on-month drop, prompting some state media to proclaim that the myth of mainland property prices only rising had finally been disproved.

As the volumes of transactions plummeted nationwide, an increasing number of property developers, including major firms such as Vanke, started lowering prices, prompting earlier buyers to stage demonstrations over sharp discounts given to late buyers. State media have also begun to carry stories of smaller developers being on the verge of collapse after the government had successfully shut down their access to non-banking sources to raise money.

In a sign of their desperation, some developers reportedly borrowed money from loan-shark syndicates at exorbitant rates, but even that source of money is closing, as evidenced by recent reports over Wenzhou entrepreneurs fleeing the country after failing to honour their underground loans.

Now, mainlanders are holding their breath and waiting for the first signs of the property bubble bursting - be they the collapse of financially weak property companies or the companies beginning to cut prices drastically in downtown residential properties in big cities. Thus far, property developers have begun to reduce prices of projects only in suburban areas, while downtown prices still remain strong.

But a big uncertainty lies ahead in how big of a drop in prices the central government can withstand before it reverses the current policies. After all, local governments rely on land sales for investments in infrastructure, and a sharp fall in prices could have a debilitating impact on the overall economy.

But the mainland leadership seems to be preparing for the worst. Liu Mingkang , who recently stepped down as chairman of the China Banking Regulatory Commission, first signalled the government's intention in July that mainland banks would be able to cope even if property prices dropped by 50 per cent.

More important, a sharp fall in property prices would also give the mainland leadership a much-needed opening to rebalance the economy and to change the way it grows from the current pattern, which is 'unbalanced, uncoordinated, and unsustainable'.