House prices cool, sales plummet

The cost of homes in major cities continues to rise, but the growth rate may slow

Zheng Peng, a 28-year-old company executive in Beijing, is sitting on pins and needles these days. Any news about home prices makes him nervous.

He bought a one-bedroom apartment outside Beijing's North Fifth Ring Road in early March - a time of the year when buyers can usually get a good bargain. But this year, things are a bit different. After Zheng made his purchase, an increasing number of reports said China's real estate market was showing signs of cooling.

"I really hate these media reports that always have one-sided views," said Zheng. "Do you think home prices really will fall?"

Facts speak louder than words. According to the National Bureau of Statistics, new home prices in 57 cities out of 70 major cities across the country saw an increase month-on-month in February. The number of cities experiencing such growth reached a record low in the past 13 consecutive months - and the growth rate has been shrinking.

Moreover, the number of home sales is plummeting. According to Century 21, a major real estate brokerage firm, the number of transactions in the pre-owned home market in most of China's major cities, including Beijing and Shanghai, all saw a drop of more than 50 percent year-on-year in the first quarter.

Beijing, for instance, posted a 65 percent sales decline in the pre-owned home market and a 44 percent fall in the new home market in the first three months of this year. The situation in Shanghai was similar, with transactions decreasing 56 percent in the pre-owned home market and 40 percent in the new home market, both reaching record lows in the past five consecutive months, statistics from Century 21 showed.

"The market performance of the second quarter really matters," said Sang Yufeng, director of the development center of Century 21. "If property transactions stabilize and pick up in the second quarter, then the sluggish home sales in the first three months is just a short-term adjustment. Otherwise the pessimistic sentiment could persist throughout the whole of 2014."

Property developers' pricing strategy has also changed amid the falling number of transactions. Most of them are setting prices lower than market expectations to spur sales. Some have begun to offer discounts in cities including Hangzhou, Nanjing and Guangzhou.

China Vanke Co Ltd, the country's largest property developer in terms of market value, opened its project along Beijing's South Sixth Ring Road on March 16, at a price of 21,000 yuan ($3,390) per square meter, 3,000 yuan lower than market expectations. The move was regarded as a strong indication of a cooling market.

According to Vanke Executive Vice-President Mao Daqing, there could be a problem with China's real estate sector this year because extremely high land costs have driven selling prices beyond the reach of many buyers.

"Vanke will drive up sales by keeping prices flat. We will be conservative about land purchases to ensure a healthy cash flow," said Mao.

A tightened mortgage policy and a boost in the supply of government-subsidized housing resulted in a strong wait-and-see attitude in the market, leading to a fall in transactions and market expectations of prices, said Zhang Dawei, chief analyst with property agent Centaline.

"You can hardly find a bank that will offer a discount in the mortgage rate for first-time homebuyers, although theoretically they can enjoy a favorable rate that is 15 percent off the benchmark interest rate," said Zhang.

Meanwhile, supply and demand have also changed. In Beijing, for instance, the demand and supply for a project with a unit price around 20,000 yuan per sq m was 4-to-1 last year. But the ratio has fallen to 2-to-1 currently, according to Zhang.

The Beijing municipal government has a plan to introduce 50,000 units of government-subsidized homes into the market this year. Moreover, the central government work report released earlier this month pledged to improve the affordable housing system and set a target to begin construction on more than 7 million units and complete more than 4.7 million units of affordable housing in 2014.

However, a collapse in China's market is unlikely because most listed developers still have a solid cash flow. But different companies, products and cities will have different scenarios.

"I don't think there will be a collapse of the whole market, and problems will occur mainly with small developers with limited financing channels," Mao said.

Moody's Investors Service Inc liquidity index for Chinese property developers - which measures the number of rated developers that have inadequate liquidity - was at 18.4 percent in February, the same level as at the end of December 2013.

"We expect our rated Chinese property developers will achieve positive but smaller growth in sales revenues over the next 12 months, while maintaining adequate liquidity," said Kaven Tsang, a Moody's vice-president and senior analyst.

But the recent bankruptcy of Zhejiang Xingrun Real Estate Co (unrated) could prompt banks to become more cautious in managing their exposure to the property sector.

Xingrun, a developer based in Ningbo, Zhejiang province, went bankrupt in March when it was unable to service more than 3.5 billion yuan in outstanding debt.

"The bankruptcy appears to be an isolated incident, but it highlights the vulnerability of small, highly leveraged developers with weak sales execution abilities and high refinancing needs," said Tsang.

Following the bankruptcy, Moody's believes financiers and investors will become more selective and favor borrowers with relatively strong credit quality, thereby further pressuring the liquidity of financially weak developers.

Standard & Poor's Financial Services LLC believes consolidation in the Chinese property sector will accelerate this year, given recent events that will widen the credit differentiation among strong and weak players.

As for products, those that have a similar location and floorplan to government-subsidized housing will suffer most, while high-end projects will not be affected, said Zhang.

Developers of luxury property projects in Beijing, in fact, may further increase prices because of limited supply.

"We have only 34 units left and the number of potential buyers is higher than that amount so the sales price may climb further," said a marketing manager with Guangqu Jinmao Palace, a high-end project along Beijing's East Fourth Ring Road.

First-tier cities will remain a safer choice given the strong purchasing power of buyers and the limited supply of properties. But for some third- and fourth-tier cities, where supply has exceeded demand, a market correction is very likely, said Zhu Haibin, chief economist in China at JPMorgan Chase & Co.

"House-price inflation will moderate in 2014 because of continued credit tapering and supply adjustments. Regional differentiation will remain the main theme through this year," said Zhu.