China Real Estate Market Could See 30% Price Drop

Chinese house buyers visit a property fair in Beijing on June 25, 2010.Whether one considers China's housing market as "on the brink of collapse" or in the midst of a "healthy correction," all eyes are on what was until recently one of the more stable, and growing, global economies.

The fears are based on China's housing bubble, which is not unlike the bubble the U.S. and other countries experienced in the past two years.

What makes all this so scary for the U.S. is the concern that if China's growth slows, then their demand for U.S. goods will drop. Already, a drop in construction means less demand for steel, oil and other commodities.
China's economy has been expanding at a rapid pace for the past few years. Because of the government's concerns that prices are increasing too much, too fast, it instituted in April policies meant to stop runaway speculation on property. These policies include raising minimum mortgage rates and down payment rates, as well as tightening rules on purchases of second homes and blocking banks from financing third-home purchases altogether. There has also been discussion of instituting a property tax.

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These measures have slowed real estate sales, although prices have continued to climb, but at a slower rate. According to a government survey of 70 large and mid-size cities, prices increased 12.4 percent in May from the year before, after a 12.8 percent increase in April. Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund, told Bloomberg Television in Hong Kong that none of this is unexpected. It's a developing economy, he said, and "it's going to have bumps. "You're starting to see that collapse in property, and it's going to hit the banking system," he said.

While Rogoff doesn't believe that the global economy is in danger of a double-dip recession from a slowdown in what is poised to be the world's second-largest economy, he does point out that "China can have a normal recession, just like everyone else. Ten years without a recession is pretty unlikely."

Stephen Green, the chief China economist for the British bank, Standard Chartered, expects a housing slowdown there. "We believe developers will be forced to cut prices," he told the British newspaper The Telegraph. He predicts that housing prices in the country's biggest cities will drop 20 percent to 30 percent by the end of the year, because a glut of newly built homes are coming onto the market just as buyers are faced with the tighter restrictions in lending,

China's land minister, Xu Shaoshi, predicts that "In another quarter's time or so, the property market will probably come to a full correction and prices will fall. It's hard to say to what extend they will fall."

Another China analyst, Michael Kilbaner, head of China research at global commercial property broker Jones Lang LaSalle, calls the drop in prices "a very healthy correction. But we don't see any reason why there will be a risk of a crash at the moment."

For now, at least, China is still in good shape. Retail sales continue to be up, and as its economy continues to morph from largely agricultural to one based on manufacturing, there will be a demand for new housing.

And China, a step behind Western economies several years ago, has the advantage of seeing what happened when those housing markets grew rapidly. The preemptive strike, while painful in the short term, might help China avoid a long-term recession.

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