The trouble with Chinese real estate
Property prices in 70 major cities dropped by 1.2 percent in February from a year earlier, in the largest annual decline since records began in 2005. Prices fell for the third month in a row, after dropping 0.4 percent in December and 0.9 percent in January.
Real estate has been one of the main engines of GDP growth in China, but with prices in recent years having become so high, vast projects remain empty sometimes for years after they have been built.
According to official statistics, China’s average house prices were 15 times higher than the average urban income in 2007. In Beijing the number was 23, and in Shanghai 17.
In 2008 the annual income of urban residents rose by 8.4 percent while property rose 6.5 percent, with property still 14.74 times higher than incomes. Internationally, house price to income ratios are generally between 3 and 6.
High prices, empty buildings
China’s long period of relaxed monetary policy led to a fast expansion of bank credit that headed in large quantities towards the housing market. On the surface, it improved the banks capital adequacy ratios, asset quality and earnings. In reality it caused a bubble that saw property prices rise four-fold between 2000 to 2007.
As the speed of construction grew the number of properties on the market expanded, but sharp increases in the value of land for development kept the prices for homes increasing faster than incomes.
In 2008, the amount of real estate in China (by square metres) increased by 20.3 percent, but the amount of empty real estate also increased 21.8 percent, to 164 million square metres.
The current value of Chinese real-estate industry’s unsold inventory is calculated to be at least RMB4 trillion. This value is recorded not just on the provincial GDP increase, but also on the property developers’ balance sheet.
The problem with these numbers is that because the price is out of tune with the market, it takes an average of 33.84 months for properties to be sold. In the United States, where the housing is far from healthy, the average time to sale is still only 13 months.
It is estimated that there will be 300 to 400 million square meters of empty real estate in China by the end of this year.
Mutual interests
China’s real estate industry has a very close relationship of mutual interest with its local governments and banks.
Land accounts for 40 percent of the costs for real estate development. It also makes up one-third of local government revenues come from land sales. More than one-fifth of commercial bank loans go into the real estate market.
It is in the interests of both the banks and local governments to keep property prices high.
This causes a headache for the central government, whose control policies are rarely implemented – making it impossible to reel in the real estate bubble.
But after taking a firmer hand over the past year, it looks like some of these policies may have actually had an effect. However the desire to cool things down is not as high on the agenda at the moment.
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