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China’s overheated real-estate market has become a source of fascination and dread for investors. With a significant share of the economy tied up in construction, and global commodity prices hanging on Chinese demand, the recent drop in property prices could prove a turning point. China Vanke, the largest developer and a bellwether for the industry, said Monday that sales in November fell?down 36%, year-on-year. This marks the company’s fourth consecutive month of double-digit drops in revenues.?So how much further might house prices fall, and what would be the impact on developers’ balance sheets? Is it time to push the panic button? In a new report, Credit Suisse predicts an average drop of 20% from a peak in mid-2011 to the end of 2012. The report is entitled ‘Short-term gain? Long-term pain.’?It recommends underweighting Chinese property stocks and warns that major price cuts might not suffice to revive unit sales. ‘We believe only a significantly worsened economy can trigger a direct loosening on the China property sector; therefore, any boost to homebuyer confidence would be limited.’
If a 20% fall sounds dire, consider that some Chinese media outlets have begun speculating on the possibility of a m! uch more severe correction to what is widely seen as a bubble. Some reports flout the idea of 40-50% slump, which would have huge implications for China’s political economy. Such a rout is almost certain to be countered by aggressive monetary easing by authorities so that credit flows into the real-estate sector. Credit Suisse says that credit easing would reduce the risk of bankruptcy for developers but that ‘cash flow pressure should remain’.?Of course, a cooling down of a frothy market is exactly what China has been trying to engineer for the last year or so, using monetary policy, banking controls and limits on homebuyers. Now the slowdown has arrived, and not everyone is happy. Buyers in Shanghai have reacted angrily to discounts by developers keen to clear their inventory. Imagine their wrath if price cuts accelerate in the face of slack demand.
China bulls argue that reports of unsold units and ghost towns ignore the reality of huge pent-up demand for modern housing in booming cities. If you build it, eventually they will come. Credit Suisse is more sanguine on the question of demand, making the point that forecasts of sales volumes ignore the resale market. Not everyone will buy a new apartment or house, and investors have units to offload. So vacant new units may sit vacant for longer. This bodes poorly for the pipeline of new projects that are the lifeblood of developers and local governments that benefit from land sales. Using Ministry of Housing data, Credit Suisse estimates that existing land banks would yield 99 million units.?Around 9 million new (urban) homes were sold in 2010, a historic high. On this basis, property developers are sitting on enough land to satisfy 10 years of demand. But this excludes resales of units already in the market. Throw in resales, and the projected supply of new housing starts to stretch past 10 years, depressing demand for newly built properties. That sounds like an oversupply situation.?Of China’s current housing stock of 186 million u! nits, 49 % were built after 1995. How many are waiting to be sold onto another buyer is anyone’s guess.
Part of the debate over the outlook for China’s housing market turns on incomes and urbanisation. Towns and cites are where most new houses are being built and where people want to live, though China’s residency rules make it hard for rural migrants to settle permanently. China’s urban population is growing steadily – 50% of households were classified as urban in 2010. But this figure is as much about zoning as migration. Authorities frequently reclassify rural land as urban so that some can be requisitioned and developed as residential or commercial property. So the urban land bank expands on paper, but this doesn’t necessarily mean that more middle-class urbanites are joining the property market. The most extreme example is Chongqing, a vast municipality with over 33 million residents. Its population grew by 1% a year from 1997 to 2008. Over the same period, its urban land area grew by a compounded 12% annually. Beijing recorded a 1% compounded population growth over the same period, with 9% growth in urban acreage. Credit Suisse argues that this sleight-of-hand, which is repeated in other cities, means that demand is likely overstated and that supply could be understated. In other words, prepare for a rough ride for developers exposed to a market downturn.
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