Property market is not in doldrums
James LeungChina Daily  Updated: 2005-09-28 06:16

Despite an average fall in prices of 20 to 30 per cent over the past few months, the Shanghai property market is far from being in a slump as some commentators have suggested.

Strong public demand for new and better quality properties has been underlined by solid economic growth, which, in turn, is supported by the rapid development of the city's higher value-added services sector.

The present price correction, apparently triggered by government measures to clamp down on excessive speculation, may seem too swift and sharp to those used to the double-digit annual price rises of the past. Indeed, many prospective home buyers are reported to have postponed making a purchase for fear of a further drop in real estate value.

The latest figures show property trading in July fell about 50 per cent from a month before and the Shanghai housing index dropped nearly 3 per cent, the biggest month-to-month decline in five years. Unheard of in the past, some developers are beginning to offer incentives such as buy back arrangements to entice home buyers.

But there is no indication of the market heading for a free fall as it did in Hong Kong in 1997 when the tidal wave of the Asian financial crisis hit its shores.

In the years leading up to the market collapse in Hong Kong, rampant speculation had pushed property prices to levels few home buyers could afford. The speculative pressure was fuelled by negative real interest rates, limited supply and the massive inflow of hot money from around the region.

The outbreak of the Asian financial crisis chocked off the capital inflow and, as demand dwindled, supply suddenly become too plentiful. In the seven years to 2004, property prices in Hong Kong dropped an average 60 per cent from their peak as the economy was mired in a nagging recession.

Shanghai in 2005 is not facing the same set of problems that troubled Hong Kong. The flood of speculative money into the property sector may have dried up. But longer-term investments from institutional as well as individual foreign investors have continued to flow.

More importantly, the Shanghai economy has been humming along at a steady pace. Real interest rates will likely remain low and consumer spending continue to be robust.

As such, job security and income levels seem assured, and that is what should matter most to prospective home buyers.

In a free market environment property prices go up and down in cycles. Each cycle may last five to 10 years. Buying a home is an investment that should span a much longer period than an average market cycle. For that reason, short-term price fluctuations should not be a determining factor for home buyers.

This is particularly true in Shanghai where high demand and strong projected economic growth are expected to keep property prices on the up in the longer-term.

(China Daily 09/28/2005 page4)

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