House prices appear to be coming under control in the most expensive cities like Guangzhou and Shenzhen. A new focus on renting and harsh qualification requirements have kept developers away from land auctions. Plots are going unsold.
Photo from CFP
By HUANG Yu, ZHANG Ziyi
Property developers are holding off buying land in major Chinese cities, as sales slow and financing becomes harder to obtain, and the authorities reins in house prices. As much as 35 percent of plots have been passed in recent auctions in second-tier cities including Fuzhou, Qingdao, Jinan, and Tianjin. Now the grim outlook has spread to Guangzhou and Shenzhen, where a cooling market was once unthinkable.
Half of the offerings were passed over in Guangzhou’s second land auction this year, usually one of the most competitive in the country. Of the 48 lots for sale, only 23 were sold, at a paltry 1.5 percent overall premium. The 57-billion-yuan take was 37 percent lower than the first auction in April when prices hit record highs. The scene was more cheerful in Shenzhen, where only one lot was passed and many hit price caps. Even so, the mood was far from enthusiastic. Auctioneers had to halve bidding increments to get a response.
Both cities have new bidding rules to calm feverish bidders. Guangzhou bans developers from buying land with debt and requires at least 50 percent of the new developments in certain areas to be sold to first-time buyers. Shenzhen has set-aside rules for rentals and affordable housing. This has drastically reduced the saleable (and profitable) proportions of new developments. Both cities have lowered price caps for land and new houses.
Only 20 developers joined Guangzhou’s auction; 15 in Shenzhen’s. Li Yujia, a researcher at the Center for Housing Policy Studies, said borrowing restrictions had been a huge factor. Home sales are off and money is tight. The Evergrande crisis has made funding even harder to come by. “Developers have shifted their priorities from expansion to saving cash,” he said.
Deng Haozhi, an economist, said pessimistic forecasts make developers, especially non-state-owned ones, very cautious indeed.
“Although there’s a cap on land prices, they can’t sell everything they build, because a percentage has to be rented out, which completely changes the equation,” he said. “There’s not much to be made so they do not participate, particularly because they must have the cash to hand.”
The biggest winners are state-backed developers with cash to spare. Many have acquired large parcels of land in highly sought-after areas at reserve prices or negligible premiums. Yuexiu Property, China Overseas Property, and Guangdong Land each spent 10 billion yuan in the Guangzhou auction. China Overseas Property spent another 12 billion in Shenzhen.
Most non-state-owned developers cannot come up with the money. “The calculation is not about price or the quality of the land. It’s about whether they are even qualified to participate,” Deng said.
It is easy for government-backed developers to meet the set-aside requirements. New developments must account for renters, skilled workers, and low-income families. Only the biggest, most financially stable developers can commit to that. Hence for those big enough and already profitable, the future looks bigger and even more profitable. Things might be cheap now, for those who can afford them, but there are very few who think prices and demand will stay this low for very long. Cold properties will quickly become hot ones when the real estate market warms up again.
Demand will be kept in check in expectation of higher mortgage rates - 5.85 percent in Guangzhou - where new house prices dipped 0.1 percent in 15 months in August. The second-hand market slowed after price caps were lowered to punishing levels. The market is finally responding, but the sentiment is moderate and mixed.
Yet more buying and selling restrictions are a given. In Guangzhou, sales volumes have fallen to 5-year lows for both new and second-hand houses. Sellers are lowering expectations. Shenzhen also saw a drop in second-hand house transactions, but some new developments sold out in presale.
It’s probably neither good nor bad news for most home buyers. Inventories are huge. China is a nation of empty apartments. Supply is unlikely to become tight any time soon. Smaller, non-state-backed developers may offer discounts to generate cash.
But even for ordinary buyers, the rising value of their property is a major factor in their decision to buy. Yes, houses are meant to be lived in, not to be speculated on, but even for those who actually live in the properties, return on investment is an important metric.