Property bulges against restraint

Real estate market in China likely to see major investment swings this year

It is no exaggeration to say that China has the largest and the most eye-catching real estate market in the world. In the past year, the real estate market has experienced dramatic changes, with a cold market at the beginning, a strong wait-and-see mood mid-year and then a hot market at the end. The question is, what will the market be like this year?

I firmly believe that it will not witness the hard landing predicted by American economist Nouriel Roubini and Chinese economist Xie Guozhong. Instead, it will see a new round of price hikes. More importantly, the market structure will also undergo several rapid changes.

Recovering market

The financial crisis in the US since 2008 has been an important factor that has swayed the real estate market in China. Taking this into consideration will help us understand the logic behind the fluctuating market performances.

To withstand the impact of the crisis, the Chinese government implemented fiscal and monetary policies in 2009 and 2010 to ensure economic growth and employment. While successfully resisting the crisis impact, these policies also resulted in an overheated economy. Curbing the excessive increase in housing prices and commodity prices hence became the top priority for the government by the end of 2010.

In 2011, the government released tough real estate regulation and control policy. On one hand, it put purchase restrictions on property in big cities with high housing price rises, such as Beijng, Shanghai and Shenzhen. On the other hand, it also started an unprecedented big low-income housing construction plan to increase the supply. The regulation soon reversed people's expectation for the market.

By the end of 2011, housing supply exceeded demand. Slow market and the real estate developers' lack of funds brought property prices in some cities down noticeably, especially where purchase restriction was applied. The opening prices of some new buildings decreased by 20 to 30 percent. This situation continued until the second quarter of 2012.

At that time, China's economy was beset with difficulties at home and abroad. In the absence of any major improvement in the global economy, overseas demand for Chinese products continued to remain weak, while domestic demand was hit by one and a half years of tight financing. For the first half of 2012, the growth rate of China's GDP decreased for six consecutive months. In the second quarter of 2012, it dipped below 8 percent.

Strict purchase restrictions on property and decreases in housing prices also resulted in a quiet land market. Land parcels failed to sell at auction, and thereby put a strain on local government finances.

Under these circumstances, the government transferred its macroeconomic control goals back to guarantee economic growth and employment starting from the second quarter of 2012. The central government gradually eased monetary policy, and local governments gradually made adjustments to the purchase restriction regulations. About 40 cities in China have issued documents to make adjustments to their real estate policies.

Under the relatively loose credit requirements, the policies boosted consumer confidence and helped the market boom again. Last July, housing prices in 70 cities saw a month-on-month increase for the first time.

By November and December, in first-tier cities such as Beijing and Shanghai and second-tier cities such as Chongqing and Xiamen, some buildings were sold out on the opening day as buyers believed that housing prices may firm up again in the long term. These changes indicate that China's real estate market will finally exit the two-year bear market, and see another round of price increases. As the government's goals are to ensure economic growth and employment, the recovery of the real estate market will be a major keyword this year.