How much further will the slide in Chinese house prices go? National house prices had their third monthly decline in November, a fall of 0.3%, according to the China Real Estate Index System (CREIS). In Beijing, new apartment prices were 13.45% down y-o-y to October 2011, after rising 18% during 2010. Shanghai experienced a much smaller price-drop of 0.39%, according to the National Bureau of Statistics of China (NBSC).

In the 4th quarter, the downward trend is intensifying. In fact each month, for several months, more regions have reported falling house price, and fewer regions have reported rising prices.

The slowdown follows market-cooling measures first introduced in April 2010. The campaign intensified in 2011. The down payment for first-time buyers' mortgages was increased to 30% from 20%, that for second homes rose to 60% from 50%. Mortgages for third home purchases were prohibited. There were limitations on home purchases in more areas, credit-quota limits and higher benchmark lending rates, and new property taxes in Shanghai and Chongqing - between 0.4% and 0.6% in Shanghai, and between 0.5% and 1.2% on luxury homes and newly purchased high-end homes in Chongqing,, plus a special tax on second home purchases by people with no business or employment interest in the city.

The PBOC benchmark lending rate was raised to 6.56% in July 2011, the third interest rate hike this year.

Fighting inflation became the Chinese government's top priority.

"Residential prices will see a bigger drop in the fourth quarter of this year as the government´s tightening credit policy toward property developers and individual buyers continues and even strengthens," says Joan Wang, Savills' (Beijing) head of research.

China's economic growth slowing

Now inflation is falling fast. In November 2011, China had 4.2% inflation, only just above its 4% target, and well below July's 37-month high of 6.5%.

China's economy is now slowing significantly, with 9.5% GDP growth forecast this year, down from 10.3% growth in 2010. China's official manufacturing purchasing managers index (PMI) dipped below 50 in November, for the first time since the recovery.

Looking into the PMI's components provides an even gloomier picture. New export orders declined to 45.6 from 48.6, reflecting deteriorating global demand. New orders minus inventory dipped decisively into negative territory.

In response, the People's Bank of China cut its reserve requirement ratio by 50 basis points, effective from 5 December. RRR for large banks are currently standing at 21.5%, so the 50 basis points cut would reduce the RRR to 21%.

At the beginning of December, the remnimbi persistently fell to the bottom of its official trading range against the dollar. Beijing acted to support the remnimbi, by selling foreign exchange reserves. "The currency has never come under such sustained selling pressure, not even at the higher of the 2008 financial crisis," noted Simon Rabinovich and Robert Cookson of the Financial Times.

Previous pump-priming measures

Housing sales and property prices began to rise in China in H1 2009, boosted in November 2008 by a CNY4 trillion (US$585 billion) post-financial crisis stimulus package. Buyers took advantage of looser lending conditions and lower interest rates. Developers were able to easily get loans with the lowered capital requirements.

The package included reducing the property deed tax rate for first-time home buyers of small apartments to 1% from 1.5% (January 2009 to December 2009), introducing stamp duty and land value-added tax exemptions, and exempting sellers of residential property from the 5.5% business tax, if sold after more than two years.

Transactions strongly down in Beijing

In H1 2011, transactions of high-end units dropped by 42.6% y-o-y and 12.5% q-o-q according to Jones Lang LaSalle.

There was a 50% q-o-q decline in transaction volumes of forward delivery housing, according to the Beijing Municipal Bureau of Statistics, while the volume of existing houses sold was projected to drop by over 60% q-o-q in Q2 2011.

Shanghai: housing restrictions bite

The Shanghai secondary housing market has also slowed, rising by a monthly average of only 0.04% (-0.87% in real terms) from July 2011 to September 2011. The monthly average dropped by 0.19% in November, according to data from ehomeday, Shanghai's largest housing information portal.

According to Colliers International, new home sales in Shanghai rose despite the sluggish housing market in August 2011. However, the average transaction price slipped by 1.73% y-o-y to CNY 20,524 (US$3,227.19) per sq. m.

Decelerating mortgage market|

In Q2 2011, outstanding mortgage loans rose annually by 17.5% to CNY 6.26 trillion (US$98 billion), according to the People's Bank of China (PBOC). However, this the 14th consecutive month of decline in growth.

The deceleration is significant only perhaps by contrast with the strong mortgage market conditions of 2 years ago, in 2009, when outstanding home loans rose by 59.73%.

In 2010, the government laid down a new lending official target of CNY 7.5 trillion (US $1.1 trillion). The banks' total loans in 2011 are expected to be around CNY 6 trillion to CNY 7 trillion. Measures such as higher bank lending rates or large supplemental fees have been widely adopted by banks. Some even suspended approving mortgage loans altogether.

China's mortgage market remains small, with a 15.6% ratio of home mortgage loans to GDP.

Factors hindering mortgage market growth:

  • Mortgage lending dominated by state-owned commercial banks.
  • Banks prefer to offer loans for new housing. The mortgage market for old housing is undeveloped.
  • A mismatch between property registration and mortgage policies.
  • Banks put lean on real estate developers when buyers default on loans.

The mortgage market is led by four major state-owned commercial banks namely: Bank of China, China Agriculture Bank, China Construction Bank and Industrial and Commercial Bank of China.

Tighter lending conditions

In response to the PBOC's base rate rises, interest rates on home loans have increased steadily. In June 2011, the weighted average interest rate of home loans was at 6.83%, up by 0.66 percentage points than in March. By October 2011, there were reports some banks in 14 cities, including Shenzhen, Guangzhou and Shanghai, had raised their mortgage moan rates by 5%, to 30%.

Following the upward trend, interest rates for Housing Provident Fund (HPF) loans increased by 0.2 percentage points to 4.9% in July 2011, from 4.7%. The HPF encourages workers to save a portion of their income to buy residential properties. Similar to Singapore's scheme, when an employee registers with the HPF, the employer opens a bank account under the name of the employee. The employee contributes 5% of his monthly salary and the employer deposits the same amount. Employees can't withdraw unless they retire, pass away, or leave, but can use the funds to purchase residential properties at below market rate loans from state-owned banks. Government employees and employees of state-owned enterprises must take part, while private sector employees have the option. As of 2007, an estimated 100 million workers were registered.

Rental yields remain low

The rental market in China is heavily regulated, and the system favours the landlord. The landlord is may get large payments for breaches of contract committed by the tenant. Although major cities have no rent controls, other smaller cities may have.

In February 2011, rental yields in some major Chinese cities were between 1.9% and 4%, according to Global Property Guide research. Chengdu was an exception, having healthy yields ranging from 5.2% to 7.5%, with higher yields on larger apartments. Guangzhou and Shenzhen have lower average yields of 3.17% and 2.88%, respectively.

In Shanghai, average ordinary apartment yields were 2.92% while luxurious apartments had average yields of 2.63%. The lowest average yield was in Beijing, at 2.22%.

This year (2011), the government has allocated CNY 103 billion (US$15.6 billion) in its budget for the subsidies to support the development public rental housing, CNY 26.5 billion higher than in 2010.

China's GDP growth slowing mildly

After emerging from a "slowdown" of 8.7% in 2009 and 9.6% in 2008 with a 10.3% growth in 2010, China's economy is expected to face another mild slowdown in 2011. The IMF predicts that China's GDP will grow by 9.5% for the whole year. The IMF's latest forecast is based on the decline of external demand, decelerating investment, and the current tightening policies. Yet China's economy remains strong, and is expected to only slow modestly in 2012, with 9% GDP growth.

The slowdown was strongly evident in Q3 2011, when China's GDP had its weakest growth in more than two years. GDP grew by 9.1% annually in the third quarter, the third consecutive quarterly slowdown following the 9.5% and 9.7% growth in Q2 and Q1 2011, respectively.

Global Property Guide