In 2007, in the heady days before the financial crisis, construction noise resounded round the clock in Beijing as it raced to prepare for the Olympics.
At that time, migrant laborers could avoid the dirty work of building apartments and make 100 yuan (15 U.S. dollars) a day simply by showing up long before dawn and joining the lines at real estate developments. There, according to media reports, they held places for actual buyers, who paid them to wait at sales centers, which functioned on a first-come, first-served basis for purchase rights.
At that time, the average daily wage on a construction site was between 70 yuan and 80 yuan, so it was actually more lucrative to pretend to be a buyer than to build actual apartments.
Now, however, the press in the capital report that it’s the developers who have to pay, and they will only offer about 50 yuan, or half as much as in 2007, to migrants willing to pose as potential buyers to lure real investors.
It might just be urban legend, and of course, there’s no direct correlation between what migrant workers earn to pose as home buyers and what those apartments cost. So maybe it’s just a coincidence that a renowned Chinese expert predicted that urban home prices might halve in the next two years.
Cao Jianhai, a researcher with the Chinese Academy of Social Sciences (CASS), a central government think tank, has predicted Chinese urban home prices would probably drop by 40 to 50 percent over the next two years. Cao told Xinhua that the high apartment inventory level, the economic slowdown and slower-growing incomes were keeping the lid on urban home prices.
Estimates from researchers indicate that just in Beijing, about34 percent of the housing was on the market and it could take as long as 20 months for all those flats to find buyers.
That’s because housing has become unaffordable for many, according to a “blue paper” research report issued last month by the Beijing Academy of Social Sciences (BASS), a think tank of the city government. The report said housing prices in the capital were high compared with local incomes and international standards.
But the condition and direction of China’s property market is not so easy to ascertain. These think-tank studies, government property price reports, developers’ data and anecdotal evidence paint a confusing picture of prices, affordability and other factors.
An online debate between the BASS and a noted property mogul shows how contentious these issues and figures are.
The BASS said in its paper, released March 31, that the ratio of home prices to Beijing residents’ incomes far exceeded the United Nations’ suggested ceiling of 3:1 and that of the World Bank, which is 5:1. BASS predicted that apartment prices would fall next year, but it did not give an exact range.
“The average private-sector housing price in Beijing was about 13,000 yuan per square meter as of November, which translates into 910,000 yuan for an apartment of 70 square meters for a family of three,” said Dai Jianzhong, an BASS expert and one of the blue paper authors.
Tang Jianwei, an economist at the Bank of Communications, China’s fifth-largest lender, told Xinhua Thursday that in most big cities in China, per capita housing area averaged 27 to 30 sq m.
Qin Rui, a senior analyst with Beijing-based 5i5j Real Estate Service Co., said Thursday that the average new apartment price in Beijing in 2007 was about 14,000 yuan per sq m.
If a family makes a 30-percent down payment, they face monthly payments of about 4,000 yuan for 20 years. In China, buyers must make at least a 20-percent down payment for new residences and one of at least 30 percent for a second-hand flat. New flats are heavily favored in China, by a ratio of at least 4:1, according to Qin.
Since the average monthly disposable income in Beijing for a three-person household was 5,672 yuan in 2008, that would leave less than 1,700 yuan for all their other expenses, Dai added.
That would mean each person could eat a bowl of beef noodles three times a day at a local food stall, leaving virtually nothing for any other expenses such as clothing, utilities and commuting costs.
The costs of home ownership matter a lot, since at least 86 percent of China’s population owned their residences as of 2005, according to the International Monetary Fund.
The fund noted that about 65 percent of the home-owning households as of that year had bought their dwelling through government reform programs, which involved the privatization of housing stock previously provided through state work units.
The BASS blue paper thus struck a nerve, especially with city dwellers who comprise more than 45 percent of the country’s 1.3 billion population. The developers, in particular, strongly disagreed with its conclusions.
Ren Zhiqiang, president of the Beijing-based Huayuan Group, hit back on his blog, writing that the BASS experts were “ignorant.” He added that Chinese sorely needed new apartments and had the spending capacity to buy them.
The property tycoon cited rising urban home sales volume this year as evidence for his claim.
The National Bureau of Statistics (NBS) said Monday that private-sector housing sales volume increased 8.2 percent year on year in 70 large and medium-sized cities across the country in the first quarter. The 70 cities included Beijing, Shanghai, Guangzhou and other metropolises.
The statistics were based on data provided by local NBS branches on the the basis of sales volume and prices, Cheng Shu, an industry analyst with the China Index Academy told Xinhua Thursday. The academy is a private-sector Beijing-based research institute that specializes in real estate.
However, the NBS report had a figure that Ren and other property titans have downplayed: a 1.3-percent decline per sq m in March from a year earlier.
Figures released last weekend by China Vanke, the largest property developer by market capitalization, appear to bear out the trend of rising volumes at lower prices. It said its urban home sales nationwide in the first quarter rose 21 percent to 12.22 billion yuan, while the average sales price was 8,013 yuan per sq m, down 9.2 percent.
In China, the minimum 20-percent down payment goes to the developer. After the buyer obtains a mortgage, the developer gets the remaining 80 percent directly from the bank.
Most mortgages in China are for at least 20 years, and the interest rates on mortgages of more than five years is now 7.47 percent nationwide, set by the government.
Although China’s central bank compiles reports on credit extended to individuals, it doesn’t break out that lending by use, so there are no readily available figures for total mortgage lending.
Tang said that the individual mortgage volume at his bank had risen so far this year, but he declined to give a specific number. Tang added that mortgage lending trends were in line with sales growth.
The weakening economy has yet to have a substantial impact on mortgage payments. Figures from Beijing-based China Chengxin International Credit Rating showed that non-performing loan rate for individual private-sector mortgages was 4.32 percent as of June 2008, the most recent tally available, up 0.37 percentage point from the beginning of 2008.
Although there hasn’t been much change in mortgage delinquencies, some developers, especially smaller non-listed ones, encountered financial difficulties as the market weakened last year.
Larger, listed property firms have more ways to raise funds, but smaller firms mostly borrow from banks to buy land for development from governments, and their cash flow is sometimes too weak to cover construction costs and wages, Qin said.
Property developers in Beijing also had a specific problem: they had to stop work on construction projects for several weeks before and during the Olympics and Paralympics to fulfill the government’s air-quality promises for the Games. That suspension meant it took longer for some projects to be turned over to buyers, he added.
Although some developers claim that the market has been “warm” this spring, industry analysts dispute that view, saying that a combination of rising sales and falling prices hardly mean “fair weather.”
The analysts said the cause of this phenomenon was that developers were trying to accelerate sales to raise cash. There’s a lot of unsold space on hand: nationwide, the private-sector inventory was 164 million sq m at the end of 2008, up 21.8 percent from 2007.
The BASS said home supply had exceeded demand based on what Beijing residents could afford, which meant 10.44 million sq m unsold in the capital alone, accounting for 34 percent of the total home supply.
Figures from the China Index Academy showed that, at the current sales pace, it would take about 20 months for those homes to be sold in Beijing. Yet at this year’s Beijing Spring Property Trading Fair, organized by the city’s real estate association, the biggest discount on offer was 15 percent.
Sales at this year’s fair rose about 40 percent from a year earlier to 2.1 billion yuan, mostly for new apartments.
But, Qin said it was “too early to say that the domestic property market has revived” fundamentally in terms of demand, as the sales mainly reflected the government’s stimulus policies — including tax cuts — and buyers who were ready to spend at the slightest price decline.
Qin said 68 percent of his company’s clients in February and March were first-time buyers. Potential repeat buyers, either for investment purposes or trading up, were still cautious.
He said that it was a good time to get bank finance for homes, because since Oct. 27, the government had allowed banks to offer a30-percent discount on the interest rates for mortgages on new or second-hand homes.
A woman surnamed Zhang, who said she already had three apartments in Beijing, told Xinhua last Friday at the Beijing fair that she was looking for new investment opportunities but wasn’t finding much.
“Recently, rents in Beijing have declined a bit. But prices for homes in central areas or within short walking distances of subways or commuter trains are still high. If I buy apartments in those areas, I don’t think it is a wise investment. Home prices outside the Fifth Ring Road are low, but I am not sure I can get a decent rent,” she added. Areas in Beijing within the Fifth Ring Road are considered to be the central city.
One area drawing a lot of interest is Wangjing, in northeast Beijing between the Fourth and Fifth Ring Roads. Its population had swelled to about 400,000 residents in recent years, many of whom were expatriates, especially from the Republic of Korea (ROK).
Reports in Beijing newspapers have said about 20,000 ROK nationals had left the area, either because their employers cut staff amid the downturn or because of the appreciation of the yuan against the ROK won since last year. That currency shift had increased the living costs of ROK citizens.
Their departure, however, drove down rents in Wangjing. Rents have fallen 11 percent to 12 percent since November, according to Qin.
However, apart from the urban home sales volume rise, other indicators, such as land purchases by developers, had shown no signs of recovery. Beset with excessive housing inventory, domestic real estate firms are cautious about buying land or starting new projects.
Land purchased from local governments for home building fell more than 40 percent in the first quarter nationwide to 47.42 million sq m, and the actual area developed shrank 11.3 percent to52.2 million sq m.
Zhu Zhongyi, vice president of the China Real Estate Association, said the major challenge for Chinese property developers this year was to achieve a balance between new investment and selling inventory at reasonable prices.