Autumn in China is traditionally a good period for the property market, but this year a cold wind is blowing.
Over the past few days, news of a cold property market in Shenzhen has been widely circulated in major financial media. According to the report, there were only 2,043 transactions of resale housing in Shenzhen last month, a drop of nearly 80% year-on-year to hit a ten-year low, and the fifth month in a row that saw a drop in such transactions.
Shenzhen was one of China’s hottest property markets where prices were climbing, especially in the past few years when prices in Shenzhen’s golden belt were close to Hong Kong’s.
As the seller’s market turned into a buyer’s market, the writing was on the wall for the cooling of the red-hot Shenzhen property market. Apart from state-level policies to regulate the property market, from this year, the Shenzhen authorities have come down hard on the local property market.
In February, just when the property market was starting to boil, Shenzhen was the first city in China to roll out reference prices for resale housing. While these prices announced by the authorities were only “guidelines”, and the final transaction price was still decided by the buyer and seller, the reference prices affected the mindset of both parties.
More importantly, the new policy also states that banks have to base their loans on the reference prices released by the authorities. In other words, as long as the reference price is lower than the sales price, the buyer’s loan will be limited. No wonder there are comments that this is equivalent to including resale housing under the government’s fixed-price system, hitting property flippers where it hurts.
The “Big school zone” system (大学区制) that Shenzhen started in July — allocating students based on their household registration, years stayed at the property and other criteria — has also poured cold water on the red-hot property market. At the time, there was news that housing in certain school zones which were going for an astronomical 320,000 RMB (S$67,000) per square metre at the beginning of this year quickly became “disaster areas”, with owners dropping prices by millions of RMB and finding no buyers.
It is difficult to say how long this cold wind in Shenzhen will last, or whether it will spread to more cities, but China’s property market will probably not see a profitable autumn this year.
Even after China’s leaders announced in late 2016 that “houses were for living in and not for speculation”, the pressure of high property prices has not let up for most Chinese. In the context of pushing for “common prosperity”, high-profile money-making sectors have come under strict scrutiny. The internet sector where capital previously stole the show and the entertainment industry where stars were easily paid hundreds of millions RMB to appear on screen, have been hit by the recent adjustment. The property market — which has always widened the rich-poor gap — is a preventive move by the authorities against the risk to common prosperity.
Since the start of this year, China has been regulating the property market to curb soaring housing prices following the Covid-19 pandemic. According to statistics from Centaline Property Agency, China’s property market has been regulated a total of 352 times in the first seven months of the year, meaning that there were over 50 regulations per month on average. In the earlier half of August, over 30 regulatory measures had already been implemented.
It is normal for China’s housing policies to be tightened and relaxed over time, but the recent ratcheting up of such policies and the statement made by Vice-Minister of Housing and Urban-Rural Development Ni Hong at the end of last month — urging local governments to refrain from using the property sector as a means of short-term economic stimulus — demonstrate the authorities’ firm resolve in regulating the property market.
But for policymakers, if some economic growth and stability is not sacrificed, the “big mountain” that has weighed on the people for a long time may not be removed, and the challenges on the road to common prosperity will not be overcome.
Such heavy blows have led to concerns that property market regulations may lead to an overcorrection. In a report released last month, chief China economist at Nomura Holdings Lu Ting said that China’s unprecedented determination to curb the property sector could be China’s “Volcker moment”.
What is a “Volcker moment”? At the end of the 1970s, the US was facing severe inflation. Then Federal Reserve chairman Paul Volcker raised interest rates aggressively, leading to a sharp rise in unemployment. As a result, the US economy fell into a bad recession from 1980 to 1982.
Lu pointed out that China has now attached national strategic importance to reining in property bubbles and are intervening directly in the credit supply for property, leaving “little scope to dial back these curbs”. He cautioned, “Markets should be prepared for what could be a much worse-than-expected growth slowdown, more loan and bond defaults, and potential stock market turmoil.”
Win some, lose some
The government’s regulation of the property market has resulted in a chain reaction. For example, the “three red lines” introduced last year as part of new financing rules have restricted real estate companies to tight debt ratios. Property developers including Evergrande Group have fallen into debt distress because they have stepped on these red lines and risk higher chances of going bankrupt.
China’s property market has long been deeply bound with various aspects of China’s economy and society, forming a community of shared interests. Local government revenue is largely dependent on land finance, and banks have to consider the financial risks that a burst property bubble would bring. A large number of people who use property as a tool to make money and who invest in real estate debt have their net worths closely tied to the property market.
It is not an exaggeration to say that turbulence in the property market will become China’s “Volcker moment”. But for policymakers, if some economic growth and stability is not sacrificed, the “big mountain” that has weighed on the people for a long time may not be removed, and the challenges on the road to common prosperity will not be overcome. Let us not forget that while Volcker curbed inflation back then, he also laid the foundation for the long-term expansion of the US economy in the 1980s and 1990s.
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