A Cold Winter Looms For China's Once Red Hot Property Market

It’s been a rocky month for China’s real estate industry. In the first week of November, brokerages in the southern metropolis of Shenzhen have seen a 60% year on year drop in sales volume, while average home prices in Shanghai dropped to a 6 month low. Beijing, the nation’s capital, fared little better with average per-square-meter home prices falling 9.8% week on week during the last week of November.

Across China, falling prices and sales volumes are taking their toll on the nation’s brokerages and real estate firms. Although small brokerages with fewer than 50 branch offices have been hardest hit by the slumping property market, established players like Century 21, Centaline and Geland have all closed the doors on several of their offices this year.

All in all, more than 3,000 brokerage offices across the country are expected to close before the year is out, according to one industry expert, while many surviving agencies are slashing prices in order to stay competitive in a frostier market.

Most investors and market watchers see the new downturn as a direct result of policies introduced by the Chinese government earlier this year aimed at cooling down the country’s overheated property sector after years of runaway pricing, especially in affluent coastal cities. As the central government recently reiterated it support of restrictions on the real estate market, many experts are wondering whether the country is heading towards the kind of dramatic bubble-bursting scenario that China bears have been predicting for years.

Despite grim prospects for the immediate future, there is still a strong likelihood that recent the shake ups are not signs of an impending property crash but rather a gradual and controlled deflation in a market that grew too large too quickly. According to a recent article in Forbes, siting a report from Barclay’s, the Chinese government acted in time to prevent a major meltdown in the property sector and, unlike the post-2006 U.S., there are no signs of a foreclosure, employment or credit crisis looming for China’s economy as a result of its flagging real estate market.

Furthermore, while many large developers in China’s first-tier cities will have to cope with an excess in housing supplies in the short run, discounted homes (most of which are located in suburban areas far from city centres) are still finding buyers, suggesting that brokerages can still capitalise on a strong latent demand if they react quickly. Last month for example Longfor, a major Chinese developer, was able to sell 90% of its discounted homes in Shanghai in a period of five days.

In more centralized areas of first-tier cities though, which can command a higher price tag, home prices have so far remained relatively stable, even if they sell at a slower pace. Many of China’s third-tier cities, where growth has been more realistic in terms of what the local market can support, have so far seen little change to either home prices or sales.

As the Chinese property market begins to move into what is likely to be a strained fourth quarter, it’s important to remember that a 10-20% decrease in property prices was what the Chinese government hoped to achieve (in large part due to public outcry) when it reined in interest rates, tightened credit and imposed limitations on home sales in several cities earlier this year. While few brokers and home buyers in China believe that the housing market will come crashing down in the years to come, many buyers and sellers are adopting a wait-and-see attitude until the market shows signs of stabilizing.

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