China Home Prices Rise in All Cities, Defying State Curbs

China Home Prices Rise
Residential construction in Guangzhou, Guangdong Province, China. Photographer: Forbes Conrad/Bloomberg

China’s August new-home prices rose in all 70 cities monitored for the first time this year, undercutting government efforts to cool the market through higher down-payments and mortgage rates.

Prices in Beijing advanced 1.9 percent from a year ago, while those in Shanghai, the nation’s financial center, increased 2.8 percent, the statistics bureau said on its website yesterday. New home prices climbed in 67 out of 70 cities in the first half this year and were up in all but two in July.

China’s measures to control its property market are at a critical stage and the nation needs to focus efforts on curbing price increases in less affluent cities after limiting home purchases by each family in metropolitan areas including Beijing and Shanghai, Premier Wen Jiabao said on Sept. 1. Only two cities responded to the government’s July call for added restrictions on housing purchases, as local governments rely on land sales to pay mounting debt.

“Asset prices in China’s second- and third-tier cities are still rising rapidly, as local governments are reluctant to place more strict policies,” Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd., said in a phone interview. “Especially some western and central cities are facing big pressure to pay out debts, while their main revenue comes from land sales.”

Shares Fall

The measure tracking property stocks on the Shanghai Composite Index fell 2.8 percent at the close of trading, the lowest in 14 months, and the most among the five industry groups on the benchmark gauge. China Vanke Co., the nation’s biggest publicly traded developer, retreated 3.5 percent to 7.78 yuan, the lowest in almost four months, and Poly Real Estate Group Co. dropped 5.3 percent to 10.27 yuan.

Of the 70 cities, 16 posted declines from July, and another 31 were unchanged from the previous month, the data showed. That’s the first time fewer than half of the cities surveyed posted month-on-month gains, according to Samsung Securities. In July, home prices in 14 cities fell from June.

The country’s biggest property companies reported sluggish sales data last month. China Vanke said August sales dropped 13 percent from a year earlier, while Poly Real Estate, the second-biggest listed developer, posted a 12 percent drop.

The government is “close to declaring a victory on their crusade to tame property prices,” said Wee Liat Lee, an analyst at Samsung Securities. “This would also mean that it is not necessary to put on more new measures.”

Local Fund Raising

Lower property prices may affect state fund-raising efforts as 40 percent of local governments’ revenue came from land sales last year, according to China Real Estate Information Corp. Some cities, which posted rapid gains in home prices, are facing pressure to bring them down, according to Societe Generale SA.

Local governments, barred from borrowing debt directly, set up 6,576 financing vehicles by the end of 2010 to fund projects such as new roads and airports, according to a report from the National Audit Office on June 27. They had 10.7 trillion yuan ($1.7 trillion) in outstanding liabilities at the end of 2010, of which 8.5 trillion yuan was from bank loans, it said.

“China’s property policies are in a deadlock right now,” said Yao Wei, a Hong Kong-based economist at Societe Generale. “Many local governments have complained that they didn’t want more curbs.”

The government said in July that it will rein in residential prices in smaller cities after it raised down-payment requirements and mortgage rates earlier this year.

Nanchang, Urumqi

The central city of Nanchang posted the biggest increase among the 70 cities monitored by the government, climbing 9.1 percent, the statistics bureau’s data for year-on-year price changes showed. Prices in the western city of Urumqi rose 8.8 percent, the second-biggest gain.

Only two cities responded to the government’s July call for added restrictions on housing purchases, adding to the 40, including Beijing and Guangzhou, which tightened rules earlier in the year.

Property prices are too high, according to 75.6 percent of respondents to a central bank survey on Sept. 15, the highest level since real-estate data was included in the quarterly poll in 2009. The proportion of households that plan to buy property next quarter dropped 0.4 percentage point to 14.2 percent, the survey showed.

‘Turning Point’

“It’s hard to tell where the turning point of China’s housing prices is as the country is so big,” Yao said ahead of yesterday’s release. “For sure home prices will fall first in cities that imposed the strictest measures.”

Existing home prices in Beijing last month rose 1.9 percent from a year earlier, while prices in Shanghai rose 3.7 percent, according to the statistics bureau.

“Buyers are watching how much prices the developers will cut and more and more people are waiting,” said Jinsong Du, a Hong Kong-based property analyst for Credit Suisse Group AG. “This will first drag down the transaction volume.”

China’s property prices may retreat in the next 12 to 18 months as banks curb loans to developers, Hong Kong billionaire developer Vincent Lo said earlier this month in an interview.

China may relax tightening policies in the first or second quarter next year as the slowdown in economic growth will likely exceed market expectations and the inflation rate eases to the government’s target, according to Shenyin & Wanguo Securities Co. The economy may grow more slowly than expected because of a global slowdown and government measures to curb the property market, analysts led by Li Huiyong wrote in a report today.

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