Housing Trouble Grows in China by Chris Cruse and Associates Real Estate Broker
Overbuilding by Real-Estate Developers Leaves Smaller Cities with Glut of Apartments
CHANGZHOU, China - Wu Xuesong, a professor in this city on the Yangtze, says he doubled his money on an apartment he bought as an investment some years back and is ahead on a second.
Buy a third? Forget it.
Mr. Wu slides open a dining-room window and points to the dark shadow of a new apartment complex, where only a handful of lights are on. "No one lives there," he says. "That shatters my confidence" in China's long-thriving real-estate market.
Economists have worried for years that China is setting itself up for a housing-market bust. In big international cities like Beijing and Shanghai, prices continue to rise. But evidence is mounting that in dozens of third- and fourth-tier Chinese cities rarely visited by foreigners, overbuilding is out of control and a major property-market slowdown is now under way.
The 200 or so Chinese cities with populations ranging from 500,000 to several million account for 70% of the country's residential-property sales. In many of these cities, developers are slashing prices and offering freebies such as kitchen furnishings and parking spaces as they try to work through vast gluts of unsold property. Protests are breaking out among buyers angry that their investments are losing value.
Data in some of these smaller cities is scarce. But in 100 cities tracked by Nomura Holdings Inc., 8604.TO -0.81% 42% of those classified as Tier 3 and Tier 4 saw housing prices decline in March from February. Home construction in such cities is racing well ahead of population growth, says Beijing research firm Gavekal Dragonomics, as developers continue to build new projects without buyers.
A dramatic housing collapse such as the U.S. suffered a few years ago isn't thought likely here. Chinese families don't borrow as heavily for home buying as Americans, putting at least 30% down. China doesn't have sketchy mortgages like those that infected the U.S. market at its peak, nor home-equity loans that let owners finance shopping sprees on the value of their homes. Chinese financiers haven't put together arcane mortgage-backed securities such as those that blew up in the U.S.
Yet even with market strength holding up in the most prominent cities, the overall value of Chinese housing sold in the first two months of 2014 declined 5% from a year earlier, government statistics show. Private-sector data indicate the decline continued in March.
Price drops might seem a normal market response to oversupply, but when it comes to housing, the phenomenon isn't benign. China increasingly depends on real estate to drive growth.
The construction, sale and outfitting of apartments accounted for 23% of China's gross domestic product in 2013, Moody's MCO -0.65% Analytics calculates. That is up steeply from 10% in 2006 and is higher than American housing's share of GDP reached during the height of the U.S. housing boom in 2006, Moody's says.
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