Property plunge?

Bleak outlook from top real estate executive

Visitors look at model apartments at a real estate exhibition in Shenyang

Do they come with a hukou?

After dinner speeches are supposed to offer a little light entertainment. But there was little to laugh about when top real estate executive Mao Daqing delivered his oration at a recent event.

Vanke’s vice chairman was amazingly candid about his downbeat view on China’s property market. That became clear when a leaked recording of his remarks then appeared online. Mao was heard telling the audience that he doesn’t see any possibility for a rise in Chinese home prices, especially in cities with large housing inventories, “unless the government pushes out another few trillion (in stimulus).”

Worse, Mao warned of bubbles in some cities. “In 1990, Tokyo’s total land value accounted for 63.3% of US GDP, while Hong Kong reached 66.3% in 1997. Now, the total land value in Beijing is 61.6% of US GDP, a dangerous level,” he said. “Overall, I believe that China has reached its capacity limit for new construction of residential projects.”

Other statistics on the housing market have also been prompting concern. Average new-home prices rose 9.1% in April from a year earlier, decelerating for the fourth straight month after March’s 10% rise and February’s 10.8% gain, says data provider China Real Estate Index System.

Even first-tier cities are feeling the slowdown. Residential property transactions in Shanghai dropped 46.8% from a year ago during the May Day holiday (May 1-3). Shenzhen also witnessed a 60% fall in volume during the same period. But Beijing recorded the worst results. The capital city saw volumes plunge 80% from the same period last year to a seven-year low, according to consultancy Centaline. Only 169 new homes were sold in Beijing during this year’s three-day break, in sharp contrast to more than 1,000 during the same period last year.

“It looks like Beijing, Shanghai, Guangzhou and Shenzhen are definitely impacted. But big price cuts aren’t likely to happen. For second- and third-tier cities, however, if local government doesn’t introduce bailout policies, they are going to be in a very dangerous situation,” a property developer warned 21CN Business Herald.

Wuxi was the first to act. It recently loosened its urban residency registry, or hukou, rules for those willing to buy a flat. Getting a hukou means a migrant is entitled to social security benefits, making city life more attractive. It’s not hard to see why city officials made this bold move: in the first quarter of the year, housing sales in Wuxi dropped over 25% from a year ago.

Other second and third-tier cities are following suit. Last week Nanning, the capital of Guangxi, said it would grant newcomers from neighbouring towns the same home purchase rights as it gives to local residents. Binhai district in Tianjin, Fuzhou city in Fujian province, and Zhengzhou city in Henan have all implied that they are considering similar policies.

Also this week, Xinhua reported that the government of Tongling in Anhui will offer a 1% rebate on purchase prices for first-time home buyers who purchase apartments smaller than 144 square metres. It will also make it easier for non-residents to get a local hukou once they buy a house.

“Local governments have no power to cut tax but they can offer financial subsidies. The reason [to prop up the housing market] is very simple. Only by reviving the property market can local governments sell more land and make money from taxes,” property analyst Li Zhi told National Business Daily.

Needless to say, conditions look testing for the country’s property firms. In the first quarter of this year, the combined profits of the 117 listed developers (in Shenzhen and Shanghai) dropped 27%, says Securities Times. Over half of them also reported drops in revenue.

Mao at Vanke experienced it too. China’s biggest developer by market capitalisation says first quarter profit dropped 5% compared with a year ago, the first decrease in 12 years.

It’s about to get worse, says Centaline’s chief analyst Zhang Daiwei. He says that developers active in third and fourth-tier cities have seen drops that are “shocking”.

“If the first quarter was grim, the second quarter sales pressure is going to be even higher,” was Zhang’s considered verdict.

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