China wrangles the property monster

A new article from the People’s Daily warns that property price falls are set to continue:

National house prices continued to weaken basic foregone conclusion. Recently, the National Bureau of Statistics released the June 70 cities housing sales price changes, according to preliminary estimates, the first, second and third tier cities in new commercial housing prices were mostly slightly lower, and the front line north of Guangzhou-Shenzhen prices also fell, adding price ranks. Experts said that in the credit crunch, high inventories in the background, the property market will take time to digest inventory, fear of the future will further maintain cooling trend.

Towards the end it quotes a researcher who says if credit remains tight, prices could drop substantially in Q3. That prediction may partly explain why, from BusinessWeek:

China will revive mortgage-backed debt sales this week after a six-year hiatus, as the government extends help to homebuyers in a flagging property market.

Postal Savings Bank of China Co., which has 39,000 branches in the country, plans to sell 6.8 billion yuan ($1.1 billion) of the notes backed by residential mortgages tomorrow, according to a July 15 statement on the website of Chinabond. The last such security in the nation was sold by China Construction Bank Co. in 2007, Bloomberg-compiled data show.

Premier Li Keqiang is seeking to avert a collapse of the real-estate market after data last week showed new home prices dropped in a record number of cities in the world’s second-largest economy.

There are more moves to lift property restrictions too. From Nomura via FTAlphaville:

According to official Xinhua news, the municipal government of Wuhan, the capital city of Hubei province, has abolished its local resident purchase requirement (LRPR) for property over 140sqm and since 19 July has also loosened purchase requirements for non-local residents and high-quality talent. Since the first official abolition of LRPR by Hohhot in late June, several other cities have reportedly followed suit, with the full abolition in Jinan and also in certain districts in Nanchang.

FTAlphaville notes that most of the cities in the chart are higher tier so the problem is worse than it appears because over-building is worse in the lower tier districts. And from Janet Stevenson-Yang:

The designation is therefore a self-fulfilling prophecy of wealth, since the better a city’s access to political power, the more it is able to capture the investment capital and other resources needed for its economic development. Tianjin and Guangzhou are examples of this dynamic: both cities are old rustbelt territories with second-rate auto industries and little else to recommend them economically, but both are “high tier” cities due to political favor that shines upon them, for strategic and historical reasons that have little to do with regional economic competencies. Because Tianjin and Guangzhou are fundamentally rather weak economically and yet are favoured with prioritized access to capital, both are swamped by unfinished, abandoned real estate projects, and both cities are likely to emerge from this period yoked with even heavier debt burdens than their more viable sisters in the top tiers, such as Beijing and Shanghai.

The period since Xi’s ascension to office has seen a fairly fast arrogation of capital to the political centers distinguished by their high-privilege Tier 1 and Tier 2 designations. Land transactions, property prices, construction materials, sales of electronics and autos, and just about anything else, when seen through the “tier city” optic, show a reversal of the earlier trend of slower growth at the center and faster growth down the tiers. Now, the growth has moved to the top; some would say, on clearing some of the flotsam out of official statistics, that the top cities are being saved from more severe declines by government spending, while lower-tier cities in many regions are in free fall. Lower-tier cities are increasingly struggling to find their own way, sustain marginal industries, draw in capital from abroad, and resort to any device to maintain some level of financial viability.

Growth in aggregate has been stabilised but there isn’t any sense that authorities have the property correction under control.

Some help on this post came from Investing in Chinese Stocks.