Thursday, 1 March 2012

In China Real Estate Slowdown, "Prices Will Fall By 50%"

Chinese real estate has been seen as such a quick and lucrative investment that a special term, "chao fangzi" or "stir-frying houses," was invented to describe property speculation. But the new consensus is that things got too hot too quickly, and both Chinese regime authorities and major players in the real estate market are trying to stabilize what some are already calling a bubble waiting to burst.

Indeed, Chinese economists like Mao Yunshi publically admit that they see a real danger of any sudden fall-out in the housing market expanding into a larger economic downturn. He approves of measures being taken by China's large real estate firms to preempt the slowdown, and predicts that March will see housing prices drop by as much as 50%—though he hesitates to predict whether this will be enough. But for him, and other economists, the incentives behind investment in China are often the biggest challenge in creating a market oriented towards stable growth.

[Mao Yunshi, Economist]:
"There are several reasons behind the house market bubble. The main one is poor investment channels. Rich people have no place to invest, so they go buy houses. If there were good investment opportunities, they would not buy houses."

Some consider local government policies promoting land transfer—and officials' own participation as active investors—as a major perverse incentive.

[Qi Yanchen, Economist]:
"Land transfer payments account for more than 40% of the local fiscal revenue. Why? Because there are too many idlers in our government."

Financial analysts and ratings agencies like Standard & Poor's have pointed out that many Chinese housing loans come due in 2012, which could lead to a number of issues. Perhaps the most pressing is a sudden loss of liquidity, where potential buyers lack cash flow, causing sellers to become increasingly desperate—lowering prices, and in effect continuously pulling down the worth of real estate.

Regardless of whether it's due to overall economic conditions or localized liquidity shortages in key markets, or simply the unsustainability of the current "stir-frying houses" growth model, many analysts see a serious fall in the months ahead. The question is whether it will be managed, and how successfully.


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