A tale of tier two cities

Chinese housing market suffers from best of times and worst of times

Property w

Crowds flock to buy high-end Shenzhen apartments

When British singing sensation Adele announced her worldwide concert tour late last year, fans were thrilled. The tour follows the release of her newest album 25, which has sold over 15 million copies around the world. But soon their excitement turned to disappointment. When the 400,000 tickets went on sale in the US in December, Ticketmaster said it was flooded with millions of people chasing them. “Someone give me a Xanax and a shot of tequila,” a fan moaned on Twitter about the stress of securing one.

It is a sentiment that could resonate with some homebuyers in China. Last week long queues were forming in major cities for a chance to snap up an apartment. In Shanghai, for instance, Caixin Weekly says the queues of prospective buyers outside the local government’s property transaction offices were so long that they clogged roads. Police were called to maintain order.

In Shenzhen, gangsters even took up positions at the front of the queues at developers’ sales offices ready to offer to sell their positions to eager buyers at exorbitant rates.

Secondary market volumes have also seen a strong uptick in recent months.

China Youth Daily reports that the most talked-about topic amongst many seniors in Shanghai – where prices went up 17% in February compared with a year ago – is how much their house could fetch in the current market. Some pensioners are looking to sell their homes to take advantage of the strong demand and use the proceeds to book themselves into a nursing home.

“With Rmb4 million ($616,248), I can check into a nursing home for a first-class room at Rmb6,000 [a month]. I can live there for 55 years,” one Shanghai senior tells the newspaper.

But compared with Shenzhen, the gains in Shanghai seem almost tame. New home prices in the city soared over 50% year-on-year in February (we first indentified this upward trend in WiC290). In terms of affordability, housing prices there now equate to 20 times average disposable income. Prices have risen so far and so fast that the Hong Kong Economic Journal thinks that a bubble may already be forming.

There is certainly evidence to support that view. Xinhua reckons that as many as 30% of the current homebuyers in Shenzhen are speculators out to make a quick profit. Indeed, China Enterprise News reports that many investors have resorted to highly leveraged financing products, like crowdfunding and peer-to-peer (P2P) lending, to cover the downpayments.

If that story sounds familiar, that’s because it is. The frenzy is reminiscent of an earlier Chinese property market boom that peaked in 2013, before regulators implemented a series of measures to cool the market and stem speculation. Most of the same homebuying restrictions, however, were rolled back a year later in an effort to prop up demand amidst a struggling economy.

This time round the People’s Bank of China has been flooding the market with liquidity, cutting interest rates six times since November 2014. Last month the central bank also reduced the minimum mortgage downpayment for urban first-time buyers from 25% to 20%, the lowest level ever (though it excludes buyers in Shenzhen, Guangzhou, Beijing and Shanghai). The minimum downpayment for second-home purchases was also lowered from 40% to 30%.

The depressing run in the A-share market since the second half of 2015 looks to have led investors to pour their money into the housing market again. “Money put in the stock market is only going to go down, so why not use it to buy homes,” Professor Yin Bocheng from Fudan University’s Real Estate Research Centre tells China Youth Daily.

So with the strong momentum in the housing market, is China’s property sector out of the woods? Not quite. Xinhua calls the recent spike in home prices “artificial”. The state news agency also says that unscrupulous developers and property agents in major cities have been pushing prices up to create the illusion of scarcity, which prompts panic buying.

That said, the strategy seems to have worked: “I couldn’t sleep. Home prices in this neighbourhood have jumped almost 11% since two weeks ago,” one homebuyer in Shanghai tells Bloomberg. A 38 year-old father of two in Beijing also tells China Daily: “It is so crazy that the price of a 100-square-metre apartment has risen some Rmb400,000 in just 15 days after the Lunar New Year [which began on February 8].”

Yet, China’s property sector remains truly a ‘tale of two cities’. While first-tier cities including Beijing, Shanghai, Shenzhen and Guangzhou have seen home prices going up frantically, the housing market in smaller cities in more rural areas is still markedly depressed by an excess inventory of unsold homes. In a research report this month HSBC wrote that “a sharp surge in credit expansion” was viewed by “the central bank and local governments as a way to reinvigorate sales and digest inventory in third- and fourth-tier cities”.

According to the New York Times, unsold residential units reached a high last year at 452 million square metres, more than twice as much as in 2011 and 130 times the size of Central Park in New York. Reuters also reckons that there are as many as 13 million vacant homes across the country. To help put that in perspective, Soufun, a real estate portal, says it could take up to six years to clear out the unsold units in some smaller cities.

The problem is so severe that President Xi Jinping has recently identified the destocking of property inventory as one of the “four battles of annihilation” that China must win to revive its economy.

Some local governments are now encouraging rural dwellers to buy urban homes (see WiC309). Guangdong province, too, is in talks with large state-owned firms to turn some of the unsold stock into affordable housing, says the South China Morning Post. If successful, other provinces may follow suit.

And if sceptics need evidence the Chinese property market is not as hot as the stories from Shenzhen and Shanghai suggest, look no further than Dalian Wanda’s latest moves. Last week, the property conglomerate revealed a plan to invest $3.3 billion in a retail and theme park project outside of Paris. Wanda, which already owns the AMC theatre chain, will also spend $1.1 billion in an all-cash deal to buy out rival Carmike Cinemas (a move that will make it the biggest theatre operator in the US).

For a company that made its name and fortune as China’s biggest commercial property developer, Wanda’s continued diversification abroad suggests that its founder, tycoon Wang Jianlin, is far from convinced that the broader real estate market at home will turn around any time soon.

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