Home Prices May Fall 30% on China Government Property Policy, Analysts Say

China’s home prices may slump 30 percent as local authorities implement government measures to crack down on property speculation, according to brokerages including China Jianyin Investment Securities Co.

Home sales plunged nearly 40 percent by both units and floor space in 15 major cities last week, extending a streak of declines since mid-April, according to Zheshang Securities Co. China on May 2 raised banks’ reserve requirements for the third time this year, adding to last month’s down-payment and interest rate increases on second mortgages.

The government is escalating efforts to avert asset bubbles after a record surge in property prices. Beijing has gone further, limiting residents in the capital to buying one new home starting this month, the first city to implement a restriction authorized by the central government.

“Austerity has taken the main tone in implementing the tightening policies, and Beijing’s property measures are likely to be followed by other cities,” said Yang Qingli, a Beijing- based analyst at BOCOM International Ltd. “The extent of sales contraction will exceed what we anticipated, and the pace of home price declines will be faster than expected.”

The SE Shang Property Index of 34 Chinese developers tumbled 2.4 percent today, taking this year’s decline to 25 percent. China Vanke Co., the nation’s biggest listed developer, fell 1.2 percent at 11:03 a.m. local time on the smaller Shenzhen bourse, extending 2010’s loss to 32 percent.

Property Tax

Home prices in first-tier cities will drop by 30 percent and commercial residential by 20 percent, according to China Jianyin analyst Xing Weiwei. Shenyin Wanguo Research & Consulting Co. analyst Kris Li said a 20 percent drop without the introduction of a property tax, and a 30 percent decline with the tax, will be reasonable following declines in volume.

China is “very likely” to test a property tax this year, China Business News said on April 28, citing Gu Yunchang, a vice chairman at the China Real Estate Research Association.

China is likely to reverse the tightening policies because they will put the nation’s 8 percent economic growth target for this year at risk, according to Macquarie Securities Ltd. Such changes could happen in the fourth quarter, when the government has evidence that the market has cooled, the brokerage’s Hong Kong-based economist Paul Cavey said in an e-mailed report yesterday.

Developers Downgraded

Mirae Asset Securities Co. downgraded China Overseas Land & Investment Ltd. and three other developers to “hold” from “buy.” Property prices may fall as much as 20 percent, leading to an average 20 percent earnings decline at the eight developers the brokerage covers, analysts Stephanie Lau and Keith Yeung wrote in an April 30 report.

The State Council on April 15 announced measures including a 50 percent down payment and 1.1 times benchmark rate on second homes, and a ban on third mortgages. Property prices in 70 cities surged a record 11.7 percent in March, defying a Jan. 10 directive that ordered quickened construction of affordable housing and “strict” second-mortgage policies.

On Sidelines

“This time it seems measures adopted by local governments are more harsh than required” as the government made it clear that local officials will be held responsible for failing to curb home prices, said Shanghai-based Li at Shenyin Wanguo.

In Beijing, average contracts signed dropped by 82 percent from April to 211 units per day in the first two days of May, BOCOM International analyst Toni Ho Chi Chung said in a May 5 report, citing government data. The Chinese capital last week ordered developers to start selling uncompleted apartments within three days of pre-sale approval, compared with a 10-day requirement imposed by the housing ministry to quicken supply.

“The wait-and-see atmosphere among buyers has grown very dense,” Zhang Kunyu, general manager of investment consulting at Centaline Property Agency Ltd.’s Beijing branch, said in a phone interview. Besides hefty declines in sales and a “more obvious” drop in second-hand homes, some new projects have also started to cut prices, she added, without being specific.

Price Cuts

Evergrande Real Estate Group Ltd. will cut prices for its 40 property developments across China by 15 percent from today, the Shanghai Securities News reported, citing an unidentified person.

Still, widespread price cuts for new homes are unlikely to take place soon, as it’s “obviously not wise” for developers to seek an unguaranteed boost to sales by sacrificing profit margins, according to a Sealand Securities Co. report on April 29. Some investors are already cutting prices of second-hand homes by as much as 500,000 yuan a unit, Centaline’s Zhang said.

“Prices could stay sticky until September or October, when developers decide to accelerate sales, and potentially cut prices” as supplies increase in the second half, the Mirae Asset analysts said.

Developers

Developers found to delay home sales to speculate on further price gains or hoard land will be barred from share sales, “major asset restructurings,” or bank borrowing, the State Council said April 15. Five days later, the government ordered developers not to take deposits for sales of uncompleted apartments without proper approval and barred them from charging “abnormally high” prices.

The government plans to restrict the use of pre-sale proceeds to the construction of related projects until their completion, the China Securities Journal reported today without saying where it got the information. The move will put “huge pressure” on developers’ finances and prevent them from using the funds to buy land at high prices, the report said, citing Soho China Ltd. Chairman Pan Shiyi.

“My understanding of the policy is housing prices must come down, and prices need to go back to levels before mid- 2009,” China Jianyin said in an April 29 report, citing Li Wenjie, a member of a State Council experts panel on property market controls. Li is also North China head of Centaline.

Price Surge

The average price of new apartments in Shenzhen surged by 86.4 percent from a year earlier in March, Xinhua reported April 1, citing government data. Contracted sales in the southern city last week dropped 42 percent from the preceding seven days and were 80 percent down from 2009’s average, according to Changjiang Securities Co.

Shenzhen will limit home purchases by foreigners and citizens of Hong Kong, Macau and Taiwan to one residence, the China Securities Journal reported today, citing unidentified people.

--Zhang Dingmin. Editors: Malcolm Scott, Andreea Papuc

To contact the Bloomberg News staff for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net

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