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Reading a market rife with pitfalls
January 20, 2012, Friday
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Shanghai will continue with its policies aimed at bringing down the price of new homes in 2012, Mayor Han Zheng said last week in his annual report to the Shanghai People's Congress, the city's legislature.
His words may be a sign of encouragement for some people who have been priced out of the housing market and want nothing more than a roof they own over their heads.
However, as in the past, potential homebuyers will be asking themselves the big question: Should I buy now or wait and see if prices fall further?
According to a Reuters poll released last Tuesday, China's average home prices will probably fall between 10 percent and 20 percent this year, a scope wide enough to ease the property price bubble but modest enough to prevent a hard landing in the economy.
Across the country, Ordos, the rich mining town in the Inner Mongolia Autonomous Region, was picked by the most respondents - eight of the 21 economists and property market analysts surveyed - as the city where the steepest fall of up to 30 percent may occur.
Ordos was closely followed by the cities of Wenzhou and Beijing, where minimum 20 percent price reductions are anticipated.
Overall, only one of the 21 survey respondents thought prices would increase this year, while 11 expected price drops of 10 percent to 20 percent, and the remaining nine forecast a decline of less than 10 percent, according to the poll.
In Shanghai, a two-digit decrease - within some 20 percent - seems to me pretty likely.
Tough policy
Analysts always tell us that it's hard to predict "policy driven" markets where free market forces are restrained. Perhaps a look back at what happened in Shanghai's housing market in 2011 will give some clues looking forward.
It was the year when the so-called "toughest-ever" tightening measures were implemented by national and local governments to cool rampant speculation in property that was driving prices up.
Since late January last year, down-payment criteria and mortgage rates were tightened, and limitations were slapped on how many homes a person could buy. A property tax pilot project was introduced. The crackdown came amid concerns that the property asset bubble, if unchecked, would pop in a big crash, shaking economic growth and fomenting social unrest.
It took quite a few months for the tightening measures to bite, and when they did, the impact seemed to fall most heavily on home sales, with prices relatively unscathed.
New home sales in Shanghai last year, excluding public low-cost housing, plunged 22 percent from 2010 to about 7.3 million square meters - the lowest in six years, according to Shanghai Uwin Real Estate Information Services Co. That compared with an annual average of more than 13 million square meters in the city in the past six years.
The price side was a different story.
An industry research report released last week by Soufun, operator of the country's largest real estate website, found that developers of more than a third of apartment projects in Shanghai continued to raise their prices in 2011. Prices at one upmarket project along the Huangpu River actually soared 50 percent.
Of the 320 apartment developments available for sale in the city last year, the asking prices at 117 projects were higher at the end of the year than at the beginning. Price cutting of between 5 percent and 10 percent were found in 69 of the developments, while the remaining 42 percent of housing projects showed little or no price change at all, Soufun data showed.
The average cost of a new home in Shanghai last year rose 2.1 percent from a year earlier to 22,012 yuan (US$3,483) per square meter, the sixth consecutive annual increase.
Buyers who read the market wrong and purchase homes too early in the slowdown cycle are naturally going to be frustrated. In late October, several residential projects in outlying areas of Shanghai reduced prices by around 20 percent to try to boost sales. That triggered outrage from buyers who had purchased houses in the projects just before the discounts and felt cheated.
Delicate balance
Hundreds of homeowners flocked to the sales offices of three housing development projects beyond the city's Outer Ring Road to vent their anger. In a few cases, frustration turned to violence and sales offices were ransacked.
All the publicity highlighted the discounts on offer and created a rush of new buyers.
The central government has reiterated several times that austerity measures to curb speculation will remain in force until home prices drop to more "reasonable" levels. Analysts predict the measures won't be lifted until the second half, if even then.
For the government, it's a delicate balancing act. If the curbs are lifted too precipitously, prices may soar again. If the curbs are maintained too long, a severe slump in housing could affect the overall economy.
Gross domestic product rose 8.9 percent in China during the last quarter of 2011, the slowest pace in two-and-a-half years, according to data released on Tuesday by the National Bureau of Statistics. Analysts can speculate all they want about the 2012 trend in housing, but in the end, it's always up to the buyer to beware.
His words may be a sign of encouragement for some people who have been priced out of the housing market and want nothing more than a roof they own over their heads.
However, as in the past, potential homebuyers will be asking themselves the big question: Should I buy now or wait and see if prices fall further?
According to a Reuters poll released last Tuesday, China's average home prices will probably fall between 10 percent and 20 percent this year, a scope wide enough to ease the property price bubble but modest enough to prevent a hard landing in the economy.
Across the country, Ordos, the rich mining town in the Inner Mongolia Autonomous Region, was picked by the most respondents - eight of the 21 economists and property market analysts surveyed - as the city where the steepest fall of up to 30 percent may occur.
Ordos was closely followed by the cities of Wenzhou and Beijing, where minimum 20 percent price reductions are anticipated.
Overall, only one of the 21 survey respondents thought prices would increase this year, while 11 expected price drops of 10 percent to 20 percent, and the remaining nine forecast a decline of less than 10 percent, according to the poll.
In Shanghai, a two-digit decrease - within some 20 percent - seems to me pretty likely.
Tough policy
Analysts always tell us that it's hard to predict "policy driven" markets where free market forces are restrained. Perhaps a look back at what happened in Shanghai's housing market in 2011 will give some clues looking forward.
It was the year when the so-called "toughest-ever" tightening measures were implemented by national and local governments to cool rampant speculation in property that was driving prices up.
Since late January last year, down-payment criteria and mortgage rates were tightened, and limitations were slapped on how many homes a person could buy. A property tax pilot project was introduced. The crackdown came amid concerns that the property asset bubble, if unchecked, would pop in a big crash, shaking economic growth and fomenting social unrest.
It took quite a few months for the tightening measures to bite, and when they did, the impact seemed to fall most heavily on home sales, with prices relatively unscathed.
New home sales in Shanghai last year, excluding public low-cost housing, plunged 22 percent from 2010 to about 7.3 million square meters - the lowest in six years, according to Shanghai Uwin Real Estate Information Services Co. That compared with an annual average of more than 13 million square meters in the city in the past six years.
The price side was a different story.
An industry research report released last week by Soufun, operator of the country's largest real estate website, found that developers of more than a third of apartment projects in Shanghai continued to raise their prices in 2011. Prices at one upmarket project along the Huangpu River actually soared 50 percent.
Of the 320 apartment developments available for sale in the city last year, the asking prices at 117 projects were higher at the end of the year than at the beginning. Price cutting of between 5 percent and 10 percent were found in 69 of the developments, while the remaining 42 percent of housing projects showed little or no price change at all, Soufun data showed.
The average cost of a new home in Shanghai last year rose 2.1 percent from a year earlier to 22,012 yuan (US$3,483) per square meter, the sixth consecutive annual increase.
Buyers who read the market wrong and purchase homes too early in the slowdown cycle are naturally going to be frustrated. In late October, several residential projects in outlying areas of Shanghai reduced prices by around 20 percent to try to boost sales. That triggered outrage from buyers who had purchased houses in the projects just before the discounts and felt cheated.
Delicate balance
Hundreds of homeowners flocked to the sales offices of three housing development projects beyond the city's Outer Ring Road to vent their anger. In a few cases, frustration turned to violence and sales offices were ransacked.
All the publicity highlighted the discounts on offer and created a rush of new buyers.
The central government has reiterated several times that austerity measures to curb speculation will remain in force until home prices drop to more "reasonable" levels. Analysts predict the measures won't be lifted until the second half, if even then.
For the government, it's a delicate balancing act. If the curbs are lifted too precipitously, prices may soar again. If the curbs are maintained too long, a severe slump in housing could affect the overall economy.
Gross domestic product rose 8.9 percent in China during the last quarter of 2011, the slowest pace in two-and-a-half years, according to data released on Tuesday by the National Bureau of Statistics. Analysts can speculate all they want about the 2012 trend in housing, but in the end, it's always up to the buyer to beware.
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