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Long Term Real Estate Trends in the Chinese Market: Insights & Perspectives

July 17th, 2012 by · 18 Comments

The real estate market in major Chinese cities has been on a steady upward trend since 2006, and the pace accelerated in early 2009, shortly after the four trillion yuan ($576 billion) government stimulus package to fight the global economic slowdown and revive the Chinese economy.

Between January 2009 and October 2010, apartment prices in Beijing went up by more than 100 percent. An ordinary two bedroom apartment of 1,000 square feet in the central districts of Xicheng, Dongcheng, Haidian, and Chaoyang could easily fetch three million yuan (more than $400,000).

Take the Manting Fanyuan Apartment Complex in Beijing for example. Its location on the Third Ring in the Haidian District is very convenient. In May 2006, apartments in this development were selling at 7,500 yuan per square meter, or $87 per square foot. By October 2010, the unit price had shot up to 30,000 yuan per square meter, quadrupling in four years!

To reign in run-away real estate prices, Chinese government implemented a series of new policies:

  • The interest rate was raised by a quarter percent to 5.56 in October 2010, followed by four more interest rate hikes within the next eight months.
  • Real estate taxes were introduced in January 2011 in Shanghai and Chongqing for those buying a second home. This was the first time that China had imposed a real estate tax on property ownership.
  • Bank lending policies were also modified to restrict second and third home purchases by the same family. Down payment requirements were raised for a second home purchase, and no mortgage was made available for buying a third home regardless how credit worthy a potential buyer is.
  • Some cities, like Beijing, also implemented residency requirements to curb real estate speculation. Potential home buyers were required to demonstrate that they actually live and work in the city over the previous five years by presenting tax documents and social security payment records to the banks before a mortgage could be approved.

These policies have proven to be effective in cooling down the real estate market. Starting in October 2010, real estate transactions have gone down significantly, and apartment prices in major cities have stabilized.

But a new round of government policy initiatives to stimulate the economy in early 2012, including a recent interest rate cut – the first in four years, may once again have an effect on the real estate market.

Recently, published statistics by the Beijing Real Estate Commission showed that the number of sales contracts for new and existing apartments reached 23,174 in May, a 30.3% increase over April, and 50.4% more than the figure for May 2011. This transaction level is comparable to those reached in 2010, prior to the implementation of government policies that aimed to cool down the market.

Shortly after the quarter percent rate cut in June 8, the housing market in many cities has shown signs of renewed activity. In the city of Wuhan, the numbers of newly built apartments sold on June 9 and June 10 were 534 and 540 units, respectively, the highest for a weekend this year.

Some observers and economists have warned about the potential risk of a housing bubble in major cities like Beijing and Shanghai. So far, there appears to have been no bursting of any bubbles – the last round of restrictive policies reduced the transaction level, but prices have remained steady over the past two years.

With housing prices still below those in Seoul, Singapore, and Hong Kong, it is not clear whether the real estate market in major Chinese cities is overpriced. After all, it’s a matter of supply and demand. Back in 1994, a 600 square feet apartment in Hong Kong with a harbor view was selling for well over one million dollars. You could buy ten 600 square feet apartments in suburban New Jersey for the same price.

For Chinese investors, there are few investment options for their hard earned cash, and real estate remains an attractive choice. The hard question is the same as always: is now the time to buy?

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