When New Century Real Estate cut its housing prices by 15 per cent two months ago, the Chinese developer, far from panicking, was in a triumphant mood. It believed the discount was a deft move to get ahead of the market and sell its unsold backlog of apartments.
Chinese property companies have reduced prices on only the rarest of occasions over the past decade, during which time average property values have more than doubled. New Century calculated that its cut – at the Mingjun residential complex in the eastern city of Hangzhou – would attract a flood of interest. It was right, at first.
The number of people viewing properties quintupled overnight, according to Luo Chengwu, an operations manager.
Yet by the first week of May, the initial excitement had subsided. Other developers around the city of Hangzhou had also lowered their asking prices and New Century’s offer was no longer so unique.
“Yes, we attracted a lot of customers when we made the announcement. But since then, it’s just been OK, not crazy. We’ve not been able to sell everything out,” said a saleswoman in the Mingjun showroom, pointing to the dozens of homes still available in a model of the 14-tower complex.
Mingjun is located on the margins of Hangzhou in its distant suburbs, but its fate is a central concern for the Chinese economy.
For several months it has been clear that housing markets in smaller, less-developed cities were beginning to suffer downturns. However, the government and analysts long believed that bigger, wealthier cities were better insulated from the pressures.
Hangzhou has shaken that belief. Capital of Zhejiang province, it has a population of nearly 9m and is one of China’s richest cities. If its property market is in trouble, it is ominous for the country as a whole.
“Not long ago, some looked at Hangzhou as a top-tier property market. Now, oversupply is apparent even there,” said Du Jinsong, an analyst with Credit Suisse, who has taken investors on tours of the city in recent months to survey its challenges.
In the first four months of the year property sales across the country fell 7.8 per cent in value terms from the same period a year earlier, according to government figures released yesterday. That has already hurt sentiment among property developers, which cut investment in new projects, pushing newly started floor space in China down by 22.1 per cent in the first four months, compared with a year earlier.
Property investment directly accounts for nearly a fifth of Chinese gross domestic product, so if bulging inventories lead to slower construction, as they should, the consequences for economic growth will be unpleasant.
Observers could be forgiven for thinking that China has been here before. The housing market briefly wobbled in 2008 and 2011, only to rebound with great vigour. But on both those occasions the slowdowns occurred because the government had deployed tightening measures to try to rein in runaway prices. This time, it is market forces leading the way. “This downturn is almost entirely because of the oversupply,” Mr Du says.
At the current pace of home sales in Hangzhou, it will take buyers about 25 months to digest the existing supply of property in the city, according to data from China Real Estate Index System. That is well above the average 10-month inventory of recent years.
A similar pattern is playing out across China. The worst laggards are still what are often referred to as third and fourth-tier cities, which have populations of roughly 1m-3m people. Their housing inventories have climbed to more than 30 months’ worth of sales from 25 at the start of 2012, according to UBS.
However, the headwinds are now also reaching China’s biggest cities. Housing sales in the country’s four massive metropolises – Beijing, Shanghai, Shenzhen and Guangzhou – fell 20 per cent on average in April from a month earlier, a steeper decline than in most smaller cities.
“The question is no longer if or when, but rather how much China’s structurally oversupplied property market will correct,” Zhang Zhiwei, an economist with Nomura, wrote in a note last week.
In Hangzhou, local media have reported that the municipal government wants to help developers by capping the upfront payments required to buy new land, a move that would ease their cash flow pressures. But it is also a measure that is designed to encourage them to buy more land – a critical source of fiscal revenues for the government – and therefore to build yet more homes.
In the fields next to New Century’s Mingjun complex, Mr Wu, an old man in a straw hat and rolled-up trousers, tends his corn. In spite of New Century’s struggles, he says the land he is working is already zoned for development and it is only a matter of time before bulldozers roll in.
“The government should have limited the land for housing according to the size of the population, but they didn’t,” he said. “They have done lots of zoning. But that’s not the same as planning.”
Additional reporting by Emma Dong
当开元房产(New Century Real Estate)两个月前将楼盘价格下调15%时，这家中国开发商不仅不是在恐慌，还洋洋得意。它相信借助此次打折可以抢占市场先机，卖出积压库存公寓，是精明之举。