Chinese realty market is definitely not dying

Brick by brick, things are getting back. The property sector, which had been shackled for the past few years, is showing signs of rebound, finally generating a sense of optimism that the stock market too will turn.

There are several indications that this crucial sector is on an uptick, but for long-term buoyancy, radical reforms are urgent. The total amount of money flowing into the property market has increased during the first six months of this year. Total investment in property development from January to July was about 3.68 trillion yuan, up 15.4 per cent over the same period in 2011. These strong growth rates, analysts say, offer enough cushion for future aftershocks.

Property loans are also on the rise. According to the central bank, 416.8 billion yuan was lent out to the real estate sector in the second quarter - a rise of 29 per cent. Local governments, whose real estate activity was strictly under leash, have also been given some leeway. They are now free to lower down-payments, offer favourable mortgage rates and lower transaction taxes in second- and third-tier cities to boost home sales. The real estate financing system has also become much more diversified. At least 67 new real estate private equity funds were registered in China during 2011, which collectively raised more than $5.86 billion, nearly double the amount raised in 2010.

Cyclical phase

These positive developments are forcing market watchers to acknowledge that China’s property market was going through a cyclical phase with natural peaks and troughs and global panic was unwarranted.

The Chinese real estate sector has gone through turbulent times, leaving doomsday prophecies in its wake. In late 2008, the industry got a phenomenal boost after the government announced a massive 4-trillion-yuan stimulus package to enhance domestic spending. Housing was a major part of the stimulus agenda, and there was a flurry of activity in the sector in the form of new projects and land deals. This boom, however, led to home prices reaching unsustainable levels, raising concerns of a housing bubble. Fears of impending mortgage crisis due to payment defaults gained currency. The global buzz centred around whether China can find its way out of the “biggest housing bubble ever created.” The government stepped in and curbed property prices and sale with a heavy hand, sending the stock market into a long and depressed phase.

The extreme volatility in the property market prompted the government to come out with a series of measures to cool the sector. Prominent among them were the hike in the minimum down-payment rate and the increase in interest rates. Realty prices across all major Chinese cities slumped by more than 30 per cent. Demand reached rock bottom, and new projects were scarce.

Demand and reforms

The tide, however, has turned now and is riding a crest. There is strong demand for property due to ongoing urbanisation. According to a study conducted by the Chinese Academy of Social Sciences, China’s urbanization is expected to reach 75 per cent by 2040, which means that more than 14 million people will move to cities every year over the next 30 years. The real estate sector sees this as a huge opportunity for development.

Other than the millions of people migrating to cities every year, the growth of the middle class is another force that is of immense importance to the property sector. The upper-mid to high-end level of the Chinese housing market, where demand is soaring along with the new middle class, is projected to cater to 250 million households over the next eight years.

After decades of brute development, the property sector is beginning to mature and transform itself to higher-level market-oriented dynamics. This process is leading to structural adjustments in all Chinese cities as well as further market liberalisation.

The journey of the Chinese realty industry has been rather skewed so far. It has entered the third level of market development with nascent property rights, but has skipped the process of reforming production factors such as land and capital. In the long term, major reforms are necessary like greater land legislation to increase land supply, framing of sophisticated property rights and allowing private capital reforms to give private enterprises entry rights to run financial businesses.

The writer is a freelance journalist based in China.