Chinese real estate bubble at risk of reflating

There are signs that China's real estate bubble is reflating.

Evergrande buys Guangzhou site for record sum
Mainland developer Evergrande Real Estate won a commercial site yesterday in Guangzhou's new business district for a city record price of 32,968 yuan (HK$40,353) per square metre.

The bid surpassed the previous record of 20,605 yuan per square metre paid by a consortium of China Overseas and Poly Real Estate for a residential site in the city in 2010.
The property slowdown in China has been mainly contained in the residential sector, though some residential developers have sold commercial projects on the cheap in order to stay in business. This news signals there's no sign of a slowdown and the bubble may even be reflating, especially since China just changed the rules on vacant land: Mainland developers to pay 20% vacant land fee.
Starting next month, developers who have not started construction work on any land in accordance to the new policy will be slapped with the levy, according to the new rules promulgated by the Ministry of Land and Resources (MLR) issued on Thursday.

Under the regulation, developers’ vacant land will be defined under three categories. First, it relates to those developed land area which are less than one-third of the total construction area, or second, the land’s investment capital outlay is less than 25 percent of the total investment amount, or third, the land on which construction has already been terminated for over a year.
If Evergrande sits on that land, it will cost them about $10 million per year.

Elsewhere, the decline in home prices is slowing or even picking up.

Price falls ease as buyers return
Property sales increased significantly in May, said Alan Chiang Sheung-lai, head of mainland residential property at DTZ. "A number of new projects in Beijing and Shenzhen drew many home seekers, who queued up overnight to buy flats. These projects recorded strong sales as the asking prices were far below market expectations and the banks offered a discount on mortgages."

Homebuyers queued for new projects in Beijing, Shenzhen, Qingdao, Nanjing and Shanghai, according to mainland media reports. Some of the projects sold out in just a few hours, but the reports said some sales were faked by developers.

In Beijing, new home prices fell 0.1 per cent in May - a slight improvement from the 0.2 per cent decline in April, the statistics bureau data showed.

New home prices in Guangzhou and Shenzhen also fell - by 0.1 per cent and 0.3 per cent, respectively, last month, up from 0.2 per cent and 0.4 per cent the previous month.
The rebound in activity has led the government to step up the rhetoric once again, this time through Xinhua:

Xinhua: Some people intentionally misread the policy signal to push up home prices again (新华网:一些人有意误读政策信号 希望再次炒高房价)

This article quotes an analyst saying the rate cuts helped release pent up demand and developers jumped on the shift in psychology by raising prices. The article goes on to reiterate the government remains committed to bringing down home prices.

The big outside factor: QE3. China's real estate market should have started slowing considerably by now and with the PBOC in a rate cutting cycle, the government may be unable to control prices. Should there be another global easing, or even one by the Federal Reserve alone, inflation will surge in China and bubble will take off again.

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