China looks to tame real estate tiger
By Howard Schneider,
Beijing — The developers at 8 Chang’an Ave. make no pretense about their ambitions, with a cavernous marble sales area, a vow to “Never Be Second” and a multimillion-dollar price tag for apartments.
What they may not have is a market, at least not much of one after Beijing’s local government in February imposed tight restrictions on who is allowed to buy property. No more investors from other cities. No more newcomers. No more third- and fourth-home buyers trying to profit from skyrocketing values.
These steps are the bluntest yet in China’s battle against a run-up in real estate prices that some fear is setting the stage for a world-shaking crash.
China’s dynamic growth has become a primary engine of the global economic rebound and vital to U.S. businesses that make or export goods here. Last week, China reported that it was growing at 9.7 percent annually — in line with a steady path of roughly 10 percent growth in recent years and the fastest among top economies.
But there is mounting concern here and abroad that the country’s economy is overheating and could undercut the country’s advantage as a low-cost exporter. China’s top leaders have cited rising prices as their chief economic concern, wary of the impact higher food and fuel prices can have on social order in the nation.
Over the weekend, China’s central bank ordered that Chinese banks increase their cash reserves, aimed at easing some of the upward pressure on prices that happens when loans are widely and cheaply available to businesses and individuals.
But this step, and similar measures targeting the Chinese financial sector, may only go so far in downshifting the Chinese economy as long as Beijing keeps the value of its currency in line with that of the dollar. The close relationship of those two currencies means that policies that stimulate economic activity in the United States could turbo-charge economic growth in China. It also means China pays more for oil, iron ore and other imported commodities.
Efforts by the Federal Reserve to invigorate the anemic U.S. recovery through an ambitious program of bond-buying, for instance, while doing little to spark inflation at home, may fan inflation in China. Beijing has pledged to let its currency float against the dollar, but the International Monetary Fund and other critics say the yuan remains substantially undervalued. By contrast, countries that allow their currencies to adjust more freely on the open market can shelter themselves from inflationary pressures emanating in the United States.
Absent the kind of changes in currency and capital markets that could reduce pressures transmitted by the U.S. dollar, China has been looking for other fixes — and perhaps nowhere more notably than in the real estate market.
The country has tamed property booms before. But the latest bout — perhaps a 50 percent increase in prices during the past year and a half — has raised concerns about how far speculative real estate investments are spread across the books of banks, corporations and state-run enterprises. Given China’s size and central role in the world economy, a sharp real estate downturn that cascades through the economy, like the housing meltdown in the United States, would cause global shock waves.
Fueled by loose bank lending encouraged during the depths of the recent financial crisis, “the issue is whether they are experiencing the kind of credit boom that inevitably ends with a bust,” the IMF cautioned in its latest report on the world economy. “There are mounting concerns about the potential for steep corrections in property prices and their implications,” the IMF said, including “an abrupt slowdown of economic activity.”
The reshaping of the real estate market here is playing out quickly — in the offices of luxury-sales agents worried about how to find clients, among executives whose businesses have been upended, in the frustrations of recently arrived Beijingers who must now wait years to qualify to buy a home. There was no subtlety in the recent edicts: No one can buy property in Beijing now unless they have paid taxes here for five years, a rule that curbs speculators from elsewhere in China or outside it, but also upsets the aims of new residents who want a place to live.
“It is a bit disappointing,” said Chen Qiangyong, who has been in the city three years and was hoping, as a high-achieving “tiger salesman” at the Homelink real estate company, to finally buy a place of his own.
His clients have reaped big profits over the past months by selling apartments soon after buying them — even lower-priced property farther from downtown generated gains of 40 percent. But in his own case, Chen said, “we are only trying to have a home.”
The latest restrictions were imposed by local governments after China’s central authorities realized their own attempts to tame housing prices weren’t working. The average apartment price in Beijing, at about $300 a square foot, is comparable to major U.S. cities — but in a country with a per capita income of $3,000. A crash program to build millions of low-income homes has been announced.
Sabrina D. Wei, head of research for property firm DTZ in Beijing, said she could sense the pressure building last year. The central authorities first attacked the problem with interest rate hikes and stricter bank lending rules, but each round had limited effect. The number of monthly sales would drop, but within weeks rebound to even higher levels.
“It was kind of out of control,” she said.
The local rules, by contrast, are starting to bite, and the issue being watched now is what type of aftershock is coming. The local Xinhua news agency recently reported a steep drop in cash flow among developers — a sign that sales may be slowing, but also, some analysts suggest, a precursor to deeper trouble for the companies and the banks that financed them. Ratings agencies like Fitch and other analysts say they are expecting a jump in bad loans as a result of the loose lending policies used to boost the economy during the 2008 crisis.
There is debate about the larger risks. While there may be a speculative aspect to the recent rise in prices, the underlying surge in property values is driven by basic economics. Millions of Chinese are moving from villages to cities, their wages are rising and national economic growth remains strong — trends that many analysts expect to continue for years.
Even if values drop sharply in coming months, “it is in the context of prices that went up 55 percent,” so investors and lenders could well absorb the fall, said Arthur Kroeber, managing director of the Dragonomics consulting firm in Beijing.
Since major banks are state-owned, they would be quickly buttressed by the central government if problems develop.
That may be little consolation along Chang’an Avenue, where sales manager Wang Linlin needs to figure out how to sell the 272 “Luxury Mansion” apartments. Seventy-two have been sold, she said, sipping lemon water near the Steinway grand piano in the development’s sales lounge. That’s well in advance of a scheduled opening of June 2012, but the new rules have changed the outlook.
“We are aiming for luxury, high-end customers and of course, the restrictions impact them,” she said. “It’s people who are coming back, from Hong Kong, from overseas. That’s the client.”
Hu Jinghui, vice president of marketing at the Bacic-5I5J real estate group, said sales are off as much as 60 percent compared with last year — and the company is debating whether to move ahead with a planned stock offering, trying to build its rental business and examining other ways to cope.
During the crisis “the government encouraged people to buy, there were loans and people rushed to the market,” he said. “It is difficult to manage or expand or go public. Policy goes up and down dramatically.”
He’s anxious about the prospect of a fast, steep drop in prices. “If there is a hard landing,” he said, “the real economy and the banks will suffer.”