Bloomberg News

China Home Price Drop Has Analysts Betting on Policy Change

November 18, 2011

(Updates with Cheung Kong’s comment in 18th paragraph.)

Nov. 17 (Bloomberg) -- Chinese housing data may show prices in the nation’s four biggest cities are falling as Premier Wen Jiabao pledges to maintain a one-and-a-half year battle to lower prices to a “reasonable” level.

Housing prices in Beijing, Shanghai, Guangzhou and Shenzhen -- home to 66 million people -- dropped from a month earlier by as much as 0.3 percent in October, a government report will show tomorrow, according to five analysts surveyed by Bloomberg News. Prices in the cities have stalled since July, data has showed.

Analysts at firms including Barclays Capital Research and asset managers such as CBRE Global Investors are betting price declines will force a policy reversal as the tightening weighs on economic growth. A rout in prices and drop in new developments would be felt from Australia and Latin America, where raw materials exports are fueling growth, to Europe and Japan, where machinery makers rely on Chinese sales.

“If the property sector slumps and ends with a hard landing, it will lead to a hard landing for the Chinese economy,” said Liu Li-gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “There’s no other industries in China that can replace real estate in the short- term as a new economic growth engine.”

Residential property accounted for 6.1 percent of the country’s gross domestic product last year, according to Citigroup Inc. China’s real estate investment rose 31.1 percent in the first 10 months, compared with 36.5 percent in the same time last year, while industrial output in October grew at the slowest pace in a year, according to the statistics bureau.

Meaningful Adjustment

Average home prices for China’s major cities or so-called tier-one cities, may fall between 20 to 30 percent as the property industry may soon face its first “meaningful” big adjustment, Beijing Business Today reported, citing Ba Shusong, a researcher at the State Council’s Development Research Center.

Housing construction accounts for about 20 percent of China’s steel consumption, according to Mysteel Research Institute, the nation’s biggest steel research firm.

Zoomlion Heavy Industry Science & Technology Co., China’s second-biggest maker of construction equipment, said the nation’s demand for cranes and excavators will continue to slow next year because of waning economic growth. Meeting the company’s 50 billion yuan ($7.9 billion) sales target this year will be “challenging,” Chairman and Chief Executive Officer Zhan Chunxin said in a Nov. 15 interview in Hong Kong.

Micro-Adjust

A 10 percent to 30 percent decline in property prices next year will shave at least 0.5 percentage point to 1 percentage point off gross domestic product, Barclays’ Hong Kong-based economist Huang Yiping said in an phone interview. The government is likely to “micro-adjust” or even reverse policy restrictions if home prices drop by 20 percent, he said.

The government will not “sit on the sideline to watch a free fall of prices,” Huang wrote in a report on Nov. 8.

In April last year, China’s cabinet raised minimum mortgage rates and down-payment ratios for some home purchases, saying “more forceful” steps were needed to cool speculation. Authorities tightened further this year and imposed housing purchase restrictions in about 40 cities. Premier Wen said that the country won’t waver on its property market curbs on Nov. 7 in a visit to Russia.

The government’s October home prices data for 70 Chinese cities is due tomorrow. Prices gained in fewer than half of the cities monitored in September for a second month, according to the national statistics bureau.

Vanke, Poly

China Vanke Co., the country’s biggest public-traded developer, said last month’s contracted sales fell 33 percent from a year ago. Poly Real Estate Group Co., the second largest, posted a 39 percent drop.

A gauge tracking China’s property shares in the benchmark Shanghai Composite Index fell 0.5 percent to the lowest in more than three weeks, extending to a 13 percent loss this year, while four of the 10 worst performers in the past three months on the MSCI China Index were Chinese developers.

“We are very low on property stocks and the reason is that we expect a decline in the residential area of between 15 to 30 percent in the next two years,” Mark Mobius, who oversees $40 billion as Hong Kong-based executive chairman of Franklin Templeton Investments’ Emerging Markets Group, said in an interview.

Canceling Auctions

Local governments are scrapping land sales as prices reverse. The southern Chinese city of Guangzhou canceled 12 of the 18 plots of land on offer on Nov. 2, the second time in two weeks, while the central city of Wuhan postponed the auction of nine plots of land twice last month.

The Housing Authority of Shanghai, the country’s financial center, ordered developers on Oct. 26 to re-register their projects with the government if price cuts exceed 20 percent, according to the official Xinhua News agency. The move came after several protests occurred in the city after developers including China Overseas Property Group Co. cut prices.

The property curbs will be in place for the next 12 months, said Justin Chiu, executive director of Cheung Kong Holdings Ltd., the developer controlled by billionaire Li Ka-shing. The company said the liquidity crunch in China offers a “golden time” for its expansion in the nation.

Billionaire investor George Soros is planning a property fund to invest in real estate projects in China, 21st Century Business Herald reported Nov. 15. CBRE Global Investors, manager of $94.8 billion of real estate assets, is mulling its first investment in China’s housing market in four years in anticipation the government will start easing its property curbs, Greater China Country Manager Richard van den Berg said in an interview this week.

“We might see that the government by middle or end of next year will start easing credit,” he said in an interview in Hong Kong on Nov. 14. “For us, that means the fundamentals which are strong will then give a boost again to property pricing.”

--Bonnie Cao, with assistance from Kevin Hamlin in Beijing and Bei Hu and Kelvin Wong in Hong Kong. Editors: Malcolm Scott, Linus Chua

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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