China's Moves to Cool Property Prices May Be Working

The push by China’s policy makers to rein in property bubbles looks to be getting traction, according to early indicators from the nation’s biggest cities.

Beijing home sales volume plunged 41 percent year-on-year last month while Shanghai’s slumped 18 percent, China Real Estate Information Corp. data show, after new purchase restrictions and tightened mortgage lending. Transactions fell 50 percent in smaller cities.

Now policy makers must balance deflating property prices with safeguarding the expansion. Efforts to curb excessive gains could cut 0.6 percentage point from 2017 economic growth, and as much as 1 point with aggressive national tightening, according to Morgan Stanley.

"Property construction will unlikely be a big support for the economy next year, as both sales and investment will decelerate," Wang Tao, chief China economist at UBS Group AG in Hong Kong, said in a conference call with reporters. Sales will continue to slow and investment growth will remain moderate for the rest of this year, she said.

Market friction could complicate the situation. Developers and homeowners have been slow to reduce prices while potential buyers are holding off because of sticker shock or hope for discounts. Economists expect the standoff will last through the end of this year before weak sales gradually drag down home prices and start to weigh on investment early next year.

Developers staying on the sidelines have led to supply and transaction shortfalls. Total new property entering the market in October plunged 61 percent from a year earlier in Beijing, Shanghai, Guangzhou and Shenzhen as developers sharply slowed sales, according to CRIC.

In Shanghai, home sales volumes have returned to normal after the enactment of recent controls to curb abnormal price volatility, Mayor Yang Xiong said over the weekend. Officials are monitoring the situation closely and weighing potential new steps to keep development steady and healthy, he said according to a microblog post from the city government.

Meanwhile, authorities have been tightening oversight. Major developers including China Vanke Co., Dalian Wanda Group Co. and Greenland Holdings Corp. were punished for violating various sale regulations, state-backed Economic Information Daily reported Friday.

Still, rising costs amid higher down-payment requirements have forced some buyers to walk away from deals. Rinko Zhang, a 30-year-old magazine editor, found out first hand.

Zhang listed her 45-square-meter one-bedroom south Beijing apartment Sept. 20 after finding a two-bedroom unit closer to work. Interest was strong, she raised the price, and a buyer agreed to an Oct. 5 signing. But they stood her up, and her agent said the buyer couldn’t afford the new higher down payment. Now she says interest in her unit has dried up.

New curbs are biting just as all key gauges on the national economic dashboard turn green. China has posted three straight quarters of 6.7 percent growth, four years of factory-gate deflation have drawn to a close, and two main manufacturing indexes are at two-year highs.

"Policy makers are afraid that if they push too hard, they’ll prick the bubble and steer the economy into recession," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "By deflating it gradually, risks are lower."

Tailored Actions

Policy makers are encouraging different cities to tailor their actions then watch and wait instead of resorting to a broad national monetary tightening as in the past, Shen said. "They’re trying to avoid repeating the chaos like last year’s stock rout."

It’s an challenge for the central bank as interest rates are too blunt a tool, and there’s an imbalance. Fevered buyers are pushing real estate prices to stratospheric heights in major cities, while some smaller cities still have vast ghost town developments standing empty.

Curbs may soon weigh on fixed-asset investment, a sector underpinning economic growth this year, and real estate services, which grew fastest in the booming services industry in the first three quarters, China International Capital Corp. economists Liang Hong and Eva Yi wrote in a report. If developers expect weaker housing prices, the latest uptick in real estate investment may lose momentum, they wrote.

Property investment has slowly recovered this year as big city home sales soared. Investment in development has picked up from a six-year low, accelerating to 5.8 percent growth in the first nine months of this year from 5.4 percent in the first eight months. But new starts, a leading indicator of investment, fell 19.4 percent year-on-year in September after a 3.3 percent gain the prior month, Bloomberg calculations based on official data show.

Systemic Risks

The government sees reason for concern. The Ministry of Land and Resources warned in a statement that "we should take heed of rising social instability caused by runaway property prices, and also keep a lookout for a sharp fall which will bring systemic financial risks."

Sellers too are jittery. In the Jiangtai Road neighborhood in northeast Beijing, realtor Ma Ping, 30, sees sellers so eager to lure buyers that they cut prices 100,000 yuan ($15,000). Transactions in the area have plunged more than two-thirds in a month, he said.

Still, other sellers are waiting for the tide to turn. Jeffrey Wang, a 36-year-old technology entrepreneur, hiked the price of his northwest Beijing home by 2,000 yuan per square meter. Realtors pestered him daily to cut the price after new rules took effect. He didn’t listen.

“I’m not in a rush," Wang said. "I think Beijing’s property prices will continue going up once the government starts loosening restrictions again.”

— With assistance by Miao Han, and Emma Dong