Shanghai targeting at property bubbles
Falling retail property prices in China's commercial capital Shanghai mean fast and easy profits in the red hot real estate market could be a thing of the past, analysts say.
Recent government-directed cooling measures have hit investors where it hurts most, with tumbling prices denting real estate revenues and possibly bankrupting smaller property developers in the months ahead.
Property transactions between April and May dropped sharply in Shanghai, with residential sales alone down to 3.13 billion yuan (US$378 million) from 7.75 billion the month before, official statistics show.
"March was the breaking point," said John Saunders, head of regional property research at brokerage CLSA. "The edict saying you had to pay the mortgage before you resell the apartment is a huge barrier for transactions."
In Shanghai and Beijing, it is estimated that real estate prices could fall by 20 to 30 percent over the next two years.
Real estate stocks have also suffered sharp declines over the past month, with the Shanghai property sub-index down more than 20 percent to 760 points.
To blame are government measures announced in April aimed at cooling unrestrained growth in the sector, analysts say.
Among them, Beijing recently implemented a variable capital gains tax depending on the length of a buyer's holding period, while pre-completion sales have been banned and land-use rights tightened up.
Banking officials are worried about speculative money flooding into the market that has made housing for the majority of Chinese earning an average 120 US dollars a month unaffordable.
"The objective is to expel speculators and these measures should prove effective," said Kenny Tse, property analyst with Morgan Stanley in Hong Kong.
"Departure of speculators and hence 'flipping' (rapid buying and selling) activities should inevitably slow property prices in the short- to medium-term," Tse said.
In May, Shanghai also enacted a new rule requiring home owners to pay off their mortgage before selling a property, while in March the floor lending rate for housing loans of five years or more was raised 20 basis points to 5.51 percent.
Loans now also require a downpayment of 30 percent of the price, up from 20 percent.
"The measures are targeting Shanghai because that is where the bulk of the growth has been," said Saunders of CLSA.
"Once you start to see prices fall it's very hard to see a recovery despite huge liquidity and (strong economic) growth. It is difficult to get people to invest in something they think will get cheaper," he added.
However, some analysts say only high-end real estate will be affected.
"Most of our worries in Shanghai are in the high-end market where 35 percent of investors are non-occupiers against 20 percent in other segments of the market," said Lina Wong, managing director for eastern China at real estate company Colliers International.