End of Golden Age for China’s Real Estate Market
After a decade-long boom, China’s real estate market has been slowing down in the last few months. This situation might pose a significant challenge to maintaining the country’s current rate of economic growth. If linked industrial activities (construction materials, etc.) are taken into account, real estate represents up to 20% of China’s GDP and 14 % of its employment.
According to the China Real Estate Index System, real estate prices plummeted for the first time in two years in May 2014, with an average decrease of 0.32 % from April in 100 Chinese cities. The fall in prices is accompanied by a drop in the sales of properties which, as a report from the National Bureau of Statistics of China shows, declined by 8.5 % over the last five months in comparison to the same period last year.
Up until the end of 2013, real estate prices had been growing steadily due to significant demand from an expanding middle class, as well as from the government’s decision to make real estate a growth lever. In the same year, however, the Central Bank hardened constraints on loans to control public and private debt. The government also implemented buying restrictions aimed at second-time homeowners in order to reduce demand and thus lower the level of high prices—often a source of public discontent. At the end of 2013, investment restrictions were then relaxed. As a consequence, individuals’ investments, which until then had been mainly directed towards real estate, partly moved away from it. The government, worried by the decline in sales resulting from these various measures, decided at the beginning of May 2014 to make access to loans easier for first-time home buyers in order to boost demand. With the same objective, several small and medium cities more seriously affected by the crisis offered individuals who bought property easier access to local hukou.
The situation has also significantly effected developers. Since 2008, the government has promoted borrowing and, as a result, several developers have resorted to state banks and to shadow banking to finance their operations. Building where ever they could, developers accumulated enormous debts. After such real estate fervor, there is now a supply excess of 3.5 million homes (according to the Survey and Research Center for China Household Finance). In 2013, the government implemented stricter control measures in shadow banking. The consequent decline in available funds, together with the drop in sales, led developers to take illegal measures to attract buyers. For example, although the law requires a down payment of 30% when buying a property, some developers, such as Shoukai in Beijing, offered a “zero down payment” policy. Practices like this enabled typically unqualified individuals to gain access to property. The urgent need of developers for capital finally drove them to lower their prices, which has resulted in a wait-and-see attitude on the part of buyers.
To conclude from this that the present situation of China’s real estate market is similar to that of the United States in 2008 would still, however, be incorrect. In fact, there are rather few risks of a banking crisis because the total value of real estate loans does not exceed 8% of the value of the properties, in comparison to the 43% it reached in the United States in 2008. Further, the great need for housing arising from the country’s rapid urbanization suggests that the real estate market is not likely to collapse any time soon.