Real estate bubble set to burst

More than 1,000 real estate development companies went out of business last year and another 1,000 are expected to go bankrupt this year. Unreasonably high home prices, pushed up by developers, are responsible.

A series of preferential polices have been adopted to boost the sluggish real estate industry. Some local governments are even using their budgets to subsidize developers. But these measures are not enough.

The housing market is caught in a dilemma. The current prices are still too high. Supply exceeds demand but the market is not forcing prices to an acceptable level.

Beijing's developers alone are sitting on some 360,000 empty finished houses. A rush of potential buyers in the near future is unlikely. Some companies are reluctant to admit the housing bubble is about to burst but all signs indicated just that.

Lower home prices, if they do come, will be too late; market confidence will already be eroded beyond repair.

More real estate companies should have followed Vanke. The Guangzhou-based property company slashed its home prices 30 percent early last year, helping it unload all its unsold houses.

But now conditions are worse. Even a 50 percent discount made by some developers recently failed to boost their sales volume.

Most of the empty houses were built when construction expenses were stratospheric. On top of that developers often had to fork over extra money to bribe corrupt officials to get much-needed land.

The area of unsold new houses in 70 major cities nationwide amounts to 133 million square meters, according to the National Bureau of Statistics. But many believe this figure may be a serious underestimation.

So much wealth tied up in piles of cold steel and cement may hinder the government's plan to spur domestic demand.

The authorities should be aware the country's profound problems lie on its unreasonable economic structure and unbalanced industrial development and wealth distribution.

Niu Dao, real estate commentator www.cnstock.com

(China Daily 01/12/2009 page2)