June 26,2008

Shrinking House Sales and the Fear of "Deep Adjustment" Across China

By CSC staff

Shrinking real estate sales are spreading, from Shenzhen northwards to Shanghai and Beijing. More and more, city-dwellers who have hotly pursued the newest construction are sitting back and waiting.  A fall in prices, maybe quite steep, appears more and more to be in the offing, and the government, once worried about soaring prices, is now seeking to emphasize the stability of the real estate market.

The average price for new construction in May in Shenzhen was 10,254 yuan per square meter, lower than the price in April.

In March, average property prices in Shenzhen, after dropping by 16.53% over the previous month, were back to last year’s April and May level at 13,618 yuan per square meter. Shenzhen’s Municipal Bureau of Land Resources and Housing Management is cannily guessing 2008 will be an adjustment period for Shenzhen’s real estate industry.

"A spontaneous price adjustment such as the housing price drop in Shenzhen has been completely unexpected, not only by real estate developers but the government also," said Zhong Wei, director of the Financial Research Center of Beijing Normal University.

At present, less than 70% of the new construction in Beijing, Shenzhen, Guangzhou, and Nanjing has been sold.

Between January and May, 19758 houses and apartments were sold in Nanjing, nearly 47% fewer than the year before.   

In Hangzhou, property sales were also down in April. With prices rocketing over the year by 79.7%, it has become increasingly harder to sell, and trading volume slumped by 31.2%. Statistics show that from January to April, house construction in Zhejiang Province increased by 8.3% over the same period last year, but, due at least in part to tight credit and higher loan interest, area sales fell by 13.9%.

Falling sales volumes haunt Beijing’s real estate market. Real estate industry observers say housing supply in the capital has surpassed demand. In April and May this year, new housing reached 1.865 million square meters, while turnover was only 1.707 million square meters. In April alone, supply increased by 995,000 square meters with sales of only 747,000 square meters, so 248,000 square meters is sitting empty.

Shanghai, where the houses prices have heretofore consistently risen, is wavering. While the prices keep going up, the trade volume is steadily dropping.

Shanghai’s May new construction sales volume reached only 44.5% of the total amount in May, 2007. The total turnover was only 1.4331 million square meters, and the supply/demand ratio was 1.24:1. Of that total, residential housing volume was 1.0428 million square meters, and the supply/demand ratio 1.28:1. In spite of this, more new houses are set to be launched on the market this month and next.

"Nationwide, in the first months of this year, 84.48 million square meters of building was completed, an increase of 20.2% over the same period last year, and the growth rate is 10.3% higher than in the same months last year. But the sales turnover was only 133.64 million square meters, a drop of 4% over the same period last year," says a recent report from the Economic Research Center of Renmin University. In the first four months of this year, the nationwide newly developed property sales volume was apparently shrinking.

Nie Meisheng, Chairman of the China Real Estate Chamber of Commerce, thinks China is now experiencing "real estate stagflation," characterized by rising prices and falling sales volumes. This stage, he predicts, could be followed by panic among house purchasers and losses to real estate developers, leading to bank credit risk.

The hot real estate investment has slowly cooled down, but the investment in this area is still much higher than in other areas.  

According to a Guotai Junan Securities research report, the 2008 fund gap, i.e. capital invested but not recovered, for the real estate industry will be 710 billion yuan, doubling the sum of mid- and long-term loans in 2007, when the industry reached its peak. On average, the fund gap for every developer will be 12.01 million yuan, accounting for 24% of sales revenue last year.

In Shenzhen, since July last year, commercial banks have started to pull back on housing loans. In August of last year, outstanding loans stood at 14.5 billion yuan. In September, the number had fallen to 9.9 billion yuan, and in October to 4.9 billion. 

"Except for some single areas, real estate developers have not yet experienced a complete cycle. They thought property prices would just keep on increasing, and they could continue to make rich profits from it. This adjustment will help them change their ideas. Most real estate developers will have to reduce prices," said Zhong Wei.

The Renmin University report reached the same judgment.  "Decreasing demand and increasing supply indicates that housing prices may drop as a whole, and take a deep dive in the second half of this year and next year."



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