China housing market inventory

Mixed Signals on Real Estate's Blind Corner
More than 500 excited shoppers patiently queued late into the night October 25 for a chance to buy a deeply discounted condominium home in a remote section of Shanghai's Pudong District.
the deep price cuts drew a lot of buyers into the market, so does it mean the housing market will stabilize?
Yet broader, third-quarter earnings reports from real estate companies around the country painted a darker picture. Among 49 real estate companies listed on the Shanghai and Shenzhen bourses that reported quarterly results as of October 25, combined housing inventory had climbed 140 percent between June and September, and homes worth about 531 billion yuan altogether were still waiting for buyers. In addition to this mounting backlog of inventory, the companies' financial reports pointed to deteriorating cash flow.
Slowing sales always lead the price reductions. Inventory is growing and developers are using price cuts to get out. This is similar to a bank run, when everyone tries to get their money out before the bank collapses.
Company executives decided that "whoever reduces prices first can absorb latent demand first," the source said. "What's important now is to survive. We'll consider damage to the brand later."

This section is optimistic:
Some experts say "survival" had nothing to do with the big developers' price-cutting strategy. Xue Jianxiong, an analyst at data cruncher China Real Estate Information Corp., said the companies simply sensed a marketing opportunity, and then seized it. Unlike smaller developers, the nation's big guns are less interested in making money on specific projects than maintaining stable turnover and cash flow nationwide.
The government has been pressuring developers to hold down home prices. So rather than wait for what could be more forceful policy action, developers decided to "reduce prices first" in order to "grab demand and take the money," said Li Guoping, chairman of real estate adviser Top Consult. "Price reductions later may be ineffective."
More significantly, big developers have changed market expectations. According to the Longfor source, the government's market-control measures are expected to continue until the end of 2012. Thus, he said, the company will have to work hard to maintain financial stability through what could be a slow period for business.
This is just wishful thinking. If the market hasn't turned, consumers won't wait around to buy homes and there won't be further price cuts. If the market has turned, these firms are going to the wall and some will not survive.
"We see the market trending toward falling sales, especially in big cities, and prices have begun to gradually decline," Vanke Vice President Xiao Li told investors during an October 25 conference call. "We think even those potential buyers who can buy homes will choose to wait because they're hoping prices will continue to fall."
That gradual decline may turn into a waterfall, if only because China doesn't exist in a vacuum: the European and U.S. economies are headed back into recession.
Guo Jianbo of Shenzhen Inland International Real Estate, a consultant, told Caixin some developers may sit on the sidelines in coming months while their competitors cut prices. They would rather wait and hope for a market turnaround that lets them sell at the high prices they really want. But waiting is risky, as government policy will ultimately determine market direction, up or down. "If macroeconomic policy doesn't change," Guo said, "there will be a domino effect of house price reductions."
If we think in terms of Elliot Wave, the first wave down is the initial selling wave, which has probably started. There's a bounce, and then all those developers on the sidelines start trying to sell and that leads to the third wave, the big selling wave when everyone looks to unload as they realize the decline isn't over. Also, if they wait for the government, they're dead. The government cannot control the economy, the upcoming problems are too big for any government to handle. (Excepting inflation, the government could decide to devalue the yuan to support housing and banking.) The government looks competent because its policies were enacted during rising social mood and anything even mildly ineffective can look like it works in an economy growing at 9% per annum. When the market and social mood turn, almost nothing they do will work.

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