In the past year, the price of new housing in Wuhan has risen by 6%. But in October, there were signs that the development trajectory of cities in central China was even more worrying.
A group of home buyers protested last month because developers reduced the prices of projects they had already bought by 30%. According to state-supported media reports last week, several demonstrators were detained.
The problem in Wuhan is the latest sign that the crisis of real estate developers across the country is putting pressure on housing prices and increasing sensitivity to the real estate slowdown, which has already threatened the broader Chinese economy.
In recent years, the authorities have taken measures to carefully control price increases to avoid the risk of asset bubbles in industries that account for the majority of household wealth.
But as the real estate industry shrinks as a whole and many developers default, officials in some regions are also taking actions to prevent prices from fluctuating in the other direction.
“Price control is more than just a price ceiling-local governments are also afraid of sharp price drops,” said Lu Ting, Nomura’s chief China economist. “They want to prevent developers from cutting prices [and] The competition is too fierce. “
In Zhangjiakou, a mountainous city in Hebei Province, prices have risen due to the role of hosting the Winter Olympics next year, but they have plummeted recently. In September, local authorities issued regulations on the grounds of “dual stability”, prohibiting the sale of newly built houses at a price lower than 85% of the original price.
Some other cities, including Yueyang and Guilin, have also added similar measures. Shenyang officials called for “two-way regulation” to limit both the excessively rapid rise in housing prices and the excessively low housing prices in order to promote the “healthy development of the real estate market.”
According to the “Daily Economic News” report, the development project in Wuhan is regarded as one of the most sought-after projects in the region, highlighting the risk of new project discounts to wider prices.
In China, since the 1990s, rapid urbanization has led to the migration of hundreds of millions of people from rural to urban areas. In stark contrast to the real estate markets in the United Kingdom and the United States, official data focus on new properties rather than existing properties.
According to data from Nomura Securities, the amount of new homes purchased last year was 1.55 billion yuan (US$2.4 trillion), more than double the 730 million yuan used to purchase existing houses.
The demand for new homes has stimulated growth, but it has also stimulated the debt of Chinese real estate developers, who have been under pressure from Beijing to reduce leverage since last summer. The liquidity crisis of the developer Evergrande and the default of several peers prompted many of them to offer discounts to their properties because they are eager to generate enough cash to maintain their business model.
Citi analysts argued last month that the authorities are trying to “limit the fall in real estate prices caused by the Hengda sale by imposing a price floor.” But they added that “price control usually does not work” because of “dealing dry up.”
From early September to October 20, Evergrande sold 3.65 billion yuan of properties, less than 1% of its total sales in 2021. Last week, Evergrande stated on its official WeChat account that 57,462 houses had been delivered from July to the end of October.
For years, officials have tried to control market forces, usually by restricting the price of newly built properties, rather than trying to tamper with prices in the secondary market. In many cities, prices are still rising despite the establishment of rules to limit prices.
Louis Kuijs, head of the Asian Economics Department of the Oxford Economics Institute, said that Chinese policymakers see rapidly rising prices as “a sign of the out-of-control real estate market” and a cause of social unhappiness.
In the months before the real estate slowdown, China took more measures to control the market, not only restricting developers’ borrowing, but also restricting bank mortgages.
In Shenzhen, measures have been introduced to extend price guidance to existing houses instead of new houses, thereby restricting mortgage loans relative to market prices. This year, other cities such as Shanghai, Ningbo and Xi’an have also introduced similar regulations.
The Shenzhen Municipal Bureau of Housing and Urban-Rural Development stated in an announcement in February that its efforts are part of a move to ensure that houses are “used for housing, not for speculation”—this is the same as President Xi Jinping’s repeated remarks in 2017 Echoes.
Although new house prices in China’s 70 largest cities fell in September for the first time since 2015, house prices in most of these cities are still much higher than last year, and there is little sign that the government will relax its efforts to regulate the market.
Lu pointed out that Beijing has asked banks to increase loans to developers, but added that the government “may maintain most of the major real estate restrictions until the situation becomes too challenging.”
But if the pressure on developers intensifies, the authorities may worry about the impact of large discounts on market sentiment. Beijing is advancing property taxes, and local governments have relied heavily on developers’ income from land purchases.
Price control has also increased the uncertainty of housing market conditions. On the social media platform Weibo, some users commenting on the Wuhan protests said that housing prices in cities in Hebei Province have also fallen sharply, but no one demonstrated.
Kuijs said: “If prices in China are really falling, then the social media sector knows the situation very well.” “If you are reading your newspaper and according to the government the price has not fallen, I’m not sure you will buy it.”
Authors: Thomas Hale, William Langley and Andy Lin in Hong Kong and Wang Xueqiao in Shanghai