Chinese housing: May Day! May Day! May Day!

Chinese markets are closed for the May Day holiday and there hasn't been much economic news out of China, but here's an update on the housing situation because the rubber is about to hit the road. I've alluded to or written explicitly in previous posts about the optimism that remains in China and most Chinese (and probably a solid majority of foreign investors) believe the housing bubble will burst painlessly from a macroeconomic standpoint. Opinion is on a downward trend though as hopes for a rescue are repeatedly slammed by the government, including several times this weekend, and growing numbers of market participants reduce their forecasts. This weekend, the Ministry of Housing and Urban-Rural Development once again stated that housing policy will remain tight (住建部再次强调严控房价 媒体称5月或有更大降幅) in what is almost starting to look like an attempt to talk down the market.

Along those lines, there is still a steady stream of falling prices news. This weekend, a development in the Beijing suburb of Tongzhou slashed prices 50% (北京楼市降价战再打响 通州房源再现“5折”)—but it was just one apartment, a sales gimmick designed to generate media coverage—and the rest of the properties were sold for about 30% off. Elsewhere in Beijing and the rest of China, price cuts remain spotty and overall prices have held up. We see 20-30% price declines regularly in the press, but the citywide prices may only be flat or down less than 1%.

The government's increasingly pointed rhetoric is aimed at developers who are sitting on inventory and big price declines are coming when those properties hit the market. Thus far, inventory has remained mostly flat as new construction offsets sales. The government doesn't want a crash, but one becomes more likely the longer developers put off the inevitable because they are playing chicken with maturing debt. Previously, I thought the government might step up if April and May saw rapid price declines, but now it is too late because the leadership transition comes in the fall and will slow the legislative process. With calls for rapid price declines picking up in the media, something has to give. Chinese buyers aren't so much optimistic as resigned to the fact that home prices go up. Despite their desire for lower prices and the increased expectation of cuts, there's still a very palpable fear that prices won't fall and this is a fleeting opportunity. The small and medium developers have a very real fear of bankruptcy and thus we find that the Chinese bubble mentality is still very much a reality; a deeply ingrained psychological factor that the government cannot ease out of. There will either be a crash in China that shakes the psychological foundation of the real estate bubble or there will be accelerating inflation that props up the market (even if the bubble deflates via slower-than-inflation price increases).

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