Chinese Market Sees Run of Growth End… Starts Run of Decline?

Chinese Market Sees Run of Growth End… Starts Run of Decline?

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Downtown Apartments in Shanghai China

Further evidence has emerged that the Chinese government’s efforts to cool the housing market are finally bearing fruit. According to the government index of 70 cities, house prices fell 0.1% in June compared to May, the first month on month decline since March last year according to experts.

Experts believe that this is the first decline in what will become a downward trend to see out this year and possibly start next year.

“This is a turning point of the overall property price trend,” Yang Hongxu, a Shanghai-based analyst with E-House China R&D Institute, told AFP.

“The decline will continue for several months once the trend is consolidated — probably lasting into the end of this year or the beginning of next year,” he said.

One has to agree with this prediction really, because now that prices have turned investors — confidence dented — will almost certainly adopt a wait and see strategy, and there could also be a major rise in supply as those left holding the hot potatoes try to off load them before their profit evaporates.

There is no way to suggest that confidence won’t be dented, because on a run of record growth like the 16 month run just seen by China, people start to believe that it will never end. This has been especially true of China, where this belief was compounded with regular reports from realtors and supposedly impartial analysts stating that the massively rising population [Can’t find a Link to a quote of analysts making such bullish statements, but I know I have read plenty of them, maybe you can have better luck] and rapidly growing affluence would sustain the growth forever more.

Maybe it would have done, but the government has worked hard to end the run of record growth, as evidenced by the fact that June prices were still almost 12% higher than June last year.

The measures started off quite small and highly targeted; things like increasing down-payments on second home purchases, and trying to loosen the relationship between realtors and mortgage brokers. Both perfectly good measures: one aimed at reducing run-away speculation and the other at reducing the likelihood of lenders giving out the level of bad-loans that crippled the US, UK and Spanish banking systems, and all aimed at cooling the market without crashing the economy.

The main target of the government’s efforts has always been the riskiest of speculators, the buyers that would see off plan properties change hands several times before they had even been built.

The first would have been immediately successful in the wider aim, because it meant that speculators would have a higher cash-to-credit ratio, assuming they didn’t scam the system, for instance using friends, family or even their prospective tenant on the mortgage document so they could get a first-timer deal*.

The prospective tenant would have been tempted into it on the basis that their rental payments would go towards the purchase of the property. In this the original speculator would still win because they tenant/buyer would pay a higher price, thus guaranteeing a profit on the property. Anyone with a poor credit rating would surely jump at such an opportunity, provided the profit was not unreasonable, though the main candidates would be close friends and family given the strict judicial system in China.

Apologies for the digression, but it is necessary to show the potential for the government measures failing to cool speculation. Not least because the measures did fail, and certainly not least because the government’s subsequent measures were also aimed at cooling speculation.

Measures that saw third home loans severely restricted to the point of near extinction, and restrictions tightened on advance sales of new developments — off plan is of course primarily the foray of the speculator, especially in a market entirely fuelled by internal buyers**.

**The Chinese property market has seen such incredible growth fuelled entirely by internal Chinese buyers; which in turn saw it fuelled by the massive growth in the Chinese economy, which continued throughout the international downturn. Part of the reason the bubble inflated was of course the fact that the government initiated stimulatory measures in a pre-emptive strike for a recession that never came. This of course caused a liquidity surge, similar to that seen in Australia and Canada, but far worse because of the level of growth the Chinese economy maintained.

In fact, it is because the growth is fuelled by internal buyers that the government’s measures have eventually worked. There is sufficient money and affluence is growing so rapidly that those fortunate enough to be a speculator in the Chinese property market needn’t risk the wrath of the government by taking the kind of shortcuts mentioned above*.