Real estate woes spread to China

(New York Times)
Updated: 2008-09-11 13:30

China has joined the United States, Britain, Spain and others on the list of nations suffering a real estate decline.

Skip to next paragraph The New York Times Although the last national statistics showed single-digit growth from July 2007 to July 2008 in the average price of commercial and residential real estate, real estate brokers say prices are down from peaks reached earlier this year, while the number of transactions has plunged.

This downturn comes as the growth rate of Chinese exports has slowed -- sharply in yuan terms -- and stock markets have plummeted. The confluence of events has resulted in what economists describe as a deceleration in China's economic growth -- although at nearly 10 percent it remains the envy of many nations.

Brokers say that sales volumes first dropped precipitously here in southeastern China, and then the decline spread across the country. Faced with few buyers, sellers started cutting their prices for residential and commercial real estate.

In some neighborhoods in the southeast, prices have dropped by 10 to 40 percent.

In other parts of the country, transactions have fallen, but prices have only started to follow. For instance, the number of home sales has plunged by two-thirds in Harbin in the northeast, though prices are down as little as 4 percent from the same period last year.

"People are thinking more carefully and taking much longer before they decide to buy or not to buy property," said Hwang Sha, a real estate broker in Xiamen in east-central China.

Cities deep in China's interior are least affected. Dan Yian, a real estate agent in Chongqing, the largest city in southwestern China, said that the volume of housing transactions there had slowed by 20 to 30 percent so far this year. But prices have not yet fallen from a stable level of $730 a square meter, or 10.76 square feet, which works out to nearly $66,000 for a typical apartment of about 970 square feet.

Export-dependent coastal cities in the mainland have had the steepest downturns in their real estate markets. Some of those problems are starting to make ripples elsewhere in Asia.

Freddy Wu, the chief executive of Hong Kong Property Services, said his real estate agency had seen mainland investors default in recent months on a tenth of their purchases of Hong Kong apartments, forfeiting the down payments that they made.

"A lot of investors from China have their cash tied up in the mainland stock market and in mainland real estate, so they would rather take a loss now," instead of being forced to sell mainland investments at a loss to come up with the cash to complete purchases in Hong Kong, Mr. Wu said.

The skylines of Chinese cities remain dotted with cranes. But Ralph J. Gerson, the executive vice president of Guardian Industries, the largest American glass-making company and the world's third-largest, said that demand was rising less rapidly in China for the company's high-tech insulated glass for modern office buildings.

"It used to be booming, and now it's growing at a slower pace," he said. Fresh evidence of broader economic problems in China came on Wednesday as the government released monthly statistics. Growth in imports and in fixed-asset investments slowed. Inflation dropped sharply at the consumer level, to 4.9 percent in August from 6.3 percent in July.

But unlike the subprime meltdown in the United States, and the resulting credit crisis, weaknesses in China's real estate market do not at this point appear to pose a threat to the vitality or stability of the financial system.

One reason is that Chinese banks require down payments of at least 30 percent, giving banks an ample cushion of cash against losses. American banks frequently did not require down payments. Foreclosures are also rare here, and many Chinese still pay cash for their homes, particularly in rural areas.

Leo Wah, a Chinese banking analyst for Moody's, said that Chinese banks could weather the decline in real estate prices, but cautioned that they could face more challenges if economic troubles spread.

"We do not believe that it would cause a serious problem, but if property prices fall some more, it won't be the only sector that has problems," he said.

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