Chinese property prices dropping faster than Dubai two years ago
Posted on 20 April 2011 with 7 comments from readers
House sales in major Chinese cities plummeted 40 per cent year-on-year in March, according to the China Index Research Institute. And the price of new homes in Beijing slumped by 27 per cent from February.
The speed and scale of this housing slump is way ahead of Dubai two years ago, where prices fell by around 50 per cent in six months.
Sales slump
Chinese land sales fell 21 per cent quarter-on-quarter to 4,372 plots in 120 cities in the first quarter of 2011; 1,473 plots were for residential projects. The average price of floor area per square metre in the 120 cities dropped 15 per cent month-on-month.
This is the initial phase of a typical property slump: sales dry up and prices fall, albeit not normally this fast. The next phase is mortgage defaults and banking losses. This compounds the misery by restricting new loans and forcing further price falls.
Given that real estate and construction comprises more than 50 per cent of GDP in China – compared with around 30 per cent in Dubai at the peak of the boom – then a housing crash will surely mean a collapse in GDP.
All the commodities that China has been importing by the ship-load must slump as a consequence, and such is the importance of this demand to the price of these commodities that their price will also fall sharply.
But housing in China is overpriced by 60-80 per cent on normal income ratios which leaves the whole banking sector exposed. Dubai banks are only just emerging from a two-year recession. Is this what we should now expect in China?
Dubai x1000
This is the long-awaited Chinese economic correction. Not surprisingly it is not being widely discussed in the Chinese media and it is a story that the Western press seems to have missed though all the statistics are published on the Internet.
But this just has to join the euro-zone debt crisis, the US budget and debt crises, and Japanese earthquake and nuclear disaster as one of the biggest threats to economic recovery. Indeed this just has to be the start of the double-dip recession.
Is it any wonder that gold and silver are gaining as safe havens?
7 Comments posted by readers:
In your last article, you quoted the World Bank chief as saying that the world is only one shock away from another crisis. THIS has to be it!
JPM are going to be bankrupted by the uncontrollable rise in the silver price.
What will S&P have to say about the US economy then?
In Taipei, Taiwan they are dropping a bit as well too but only for a small reason. The reason is that those that sell after June who bought recently will be slapped with a 15% sales tax in addition to other fees or taxes. Those that keep their property for over a year will be slapped with a 10% tax. Basically this is to squeeze out manipulators on investors which have been propping up property prices. What they want is actual buyers to buy and not investors who flip property for a profit driving up real estate prices. With this in mind you won’t be seeing prices increase over the next few months but rather dropping a bit as those investors rush to sell before June to avoid additional taxes. The reason these prices are dropping is because of government tightening and not other reasons.
When prices in Dubai and the US crashed it was not because the government was tightening their policies,lending and raising sales taxes but rather because they could not afford those homes at those prices because they had to pay a shi* load of taxes and interest on them as well.
as a follow up…i would like to swap some houses in china for some gold however!
remember reading an article just like this a year ago…and guess what’s happened in the last 12 months? prices have increased.
Over the last 3 months nowhere in Shenzhen Shanghai or Guangzhou (where we own properties so keep an eye open) have i seen in estate agents windows or new property releases declining prices.
Month on month changes have to be looked at closely…if last month in beijing there was a release of new flats in an inner city location that would spike prices up, similarly they slump if a developer sells new units in the burbs. china is a skewed market because a high percentage of the sales are new homes sold in lots by developers and this distorts the monthly figures. the second hand market where sales are spread thinner by size and location gives a better picture.
declining land sales are a consequence of the government releasing less land for development, not buyers buying less. if prices are falling it’s because the land is in less desirable locations
…lets wait and see, i doubt very much whether this is the crash or correction you forecast. but if it is then i’ll come and buy you dinner in Dubai.
by the way, off topic a little i know but…i have a friend who is a small time property developer here, i was asking him about his cost structures and margins. I was amazed when he told me that about 30% of his costs were payments to lubricate the official machinery and ensure smooth running of his operations. staggering.
Since the beginning of 2010 it was the Chinese government’s policy to curb price increases in the property market, but it has remained stubbornly high amid the most strictest of conditions. Basically the government has waged war on the speculators. We are now seeing the outcome of some of those policies. For instance only residents can purchase a house in the City, and they are not allowed to own a second home, among many more draconian type measures aimed to cool price rises.
To compare China with what happened in Dubai is really shoddy academics and reporting.
From what I know in Prime areas of Guangzhou and Shanghai along with Taipei nothing has dropped. On the outskirts prices have dropped a bit. This is normal and ok due to government tightening and not due to local problems.
replying to erik’s comment: these cooling measures controlling purchase of multiple homes in primary cities (Beijing, Shanghai Shenzhen +??) are unfortunately relatively easy to overcome as there are companies in place who will provide you with the fake insurance payment history…then all you need is the cash and a willing relative. A big scam here in SZ is the wealthy getting hold of the subsidized housing that the government build to sell at discounted prices to qualifying middle income families…you wouldnt believe the cars that are parked in these garages…and all owned by people with supposedly only modest assets.
Peter has been repeating the bursting bubble mantra for over a year now and i believe is desperate to grasp any information to support his claims. It’s a safe bet that house prices will end the year higher than at the start…all the city governments have submitted their targets to HQ and we know these forecasts have a habit of happening.