Economy

China's Hainan hopes to avoid property crash

(Agencies)
Updated: 2010-05-05 17:26

HAIKOU - With new home prices rising by almost 20 percent a month, Haikou would seem to be the dictionary definition of a property market bubble.

After China unveiled plans in late December to turn tropical Hainan island into an international tourist destination, tens of thousands of real-estate speculators headed for Haikou, the capital. Property prices predictably rocketed.

Whether the authorities succeed in deflating the bubble -- or preventing one, depending on your views -- will be a litmus test of Beijing's campaign to defuse public anger over fast-rising prices nationwide without doing serious damage to a sector that is critical for the economy.

That policymakers are facing one of their stiffest challenges in Hainan brings a sense of deja vu. After a property collapse in the province in 1993, it took more than a decade to clear up the bad loans and vacant lots that were left behind.

Feng Ke, head of the property research institute at Peking University, is confident that history will not repeat itself.

"Prices are a bit too high now, but it's unlikely to crash," Feng said.

Back then, developers were speculating with borrowed money to buy land in a game of pass the parcel. When prices peaked, the developers saddled with property -- and their bankers -- were left high and dry. This time round, the buyers are investors and many of them are paying cash, Feng explained.

Still, fully aware that an overheated property market could ultimately lead to a hard landing for the entire economy, policymakers have rolled out a series of tightening steps.

"You know, things are really nasty in places like Hainan," said one senior government official, who declined to be identified given the sensitivity of the subject.

The State Council, China's cabinet, has mandated higher down payments and mortgage rates and made it harder for investor-speculators to buy multiple homes.

The measures will moderately cool market sentiment, but demand from owner-occupiers will remain strong, particularly in second- and third-tier cities, underpinned by rising incomes and China's urbanization drive, Fitch Ratings says.

"This is consistent with the government's goal to deflate bubbles when necessary to ensure a healthy long-term trend in the real estate sector," the ratings agency said in a recent report.

Soaring prices

Walking along a deserted street in Haikou, Cao Ying can hardly believe what she has just heard: all the flats in the surrounding blocks are sold out, even though no one seems to live there. Perhaps two apartments in 10 are actually occupied, local property agents say.

New flats will come onto the market this month, but they will be priced about 15,000 yuan ($2,200) per square meter, triple the level a year ago.

"That's outrageous," she said, after getting similar information from three real estate agents, all indifferent to her protestations. "I bet they'll offer a discount when we come next time around in June," she said, not sounding sure of herself.

Pan Shiyi, chairman of top property developer SOHO China, told a forum on April 24 that more than 70 percent of China's listed property firms had over 10 billion yuan of cash in hand and would not rush to cut prices.

And Fu Wenyan, a real estate agent in Haikou, said there was no sign of a decline in the price of the villas on her books despite the new tightening rules.

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