China’s young and red-hot housing market got caught up in the recession along with the rest of the world. But its downturn became neither as severe nor as prolonged as in the U.S.
Unlike U.S. lenders, China’s state-owned banks didn’t offer subprime loans to just about anyone with a pulse, nor sell loans into secondary markets.
By mid-2009, the market caught fire again after the central government relaxed credit and rolled out other stimulus measures. As consumer confidence rose, buyers returned in force, driving up home prices.
To get a current read on housing trends in China, IBD spoke with Li-Lan Cheng, chief financial officer of E-House Holdings (NYSE:EJ - News), a top residential brokerage firm in China that is publicly traded in the U.S. Its stock has vaulted 136% over the past 12 months, though it slipped 32% from an August high.
E-House sold 100,000 housing units in 2009, a 150% jump from 2008. Even in the normally slow month of January, Cheng says, sales were brisk.
IBD: Is there a housing bubble brewing in China, leading to more government controls, as some fear?
Cheng: If you just focus on real estate in isolation you may conclude that. But if you compare what’s happening with many other industries, there is nothing unusual going on. Who is buying all those luxury cars, Louis Vuittons and Guccis? There is a tremendous amount of new wealth being created. It’s just being concentrated in a relatively small group.
If anything, there is a shortage of supply relative to the level of transactions. In fact, volume has been so strong in most major cities that we turned from a situation of oversupply to too many people chasing too few apartments.
IBD: Are average Chinese wage earners being priced out of the housing market?
Cheng: If you look at how much they are saving and consuming relative to GDP growth, they’re falling behind. But incomes are still rising. Everyone is still making more money in absolute terms.
New college grads will try to get into a relatively high-paying job working for the government, a state bank, a conglomerate or a Fortune 500 company. Then there is hope that their incomes can rise fast enough so that by the time they’re 30 they can think about buying something.
A large number of low- to middle-income families feel buying a piece of real estate is becoming increasingly out of reach. Local real estate prices in cosmopolitan tier-one cities are increasing at a much faster rate, more than 30% in prime locations, than local average income levels.
In second- and third-tier cities, most purchasers are end users buying their first home or a bigger home. In tier-one cities like Beijing and Shanghai, the people who are buying second or third homes are outnumbering the people who are buying their first homes.
IBD: Are they mainly investors?
Cheng: You could call a lot of these people investors, but they are slightly different from investors in the U.S. In China, the cost of holding property is still extremely low. There is no property tax in China. And property management fees are very low relative to the purchase price. So for a lot of these people, buying an apartment is a substitute for leaving cash in the bank.
IBD: From what I understand, banks have started to cut lending.
Cheng: Yes, they have. They have not raised interest rates (currently 4.5% to 6%) explicitly. They’ve raised bank reserve requirements and banks have slowly and quietly raised down-payment levels from 20% to 40% for most purchases. But that has not slowed down people’s purchases.
Two weeks ago, the Chinese state council issued a series of 11 points on how to regulate the real estate industry. On the bank lending side, they reiterated existing regulations: Down payments cannot be lower than 40% for second homes. First homes still qualify for 20% down if the home is not considered luxury. If you’re buying a first home and it’s high-end, then it’s 40%.
People are concerned that there might be more tightening coming. If inflation starts to creep up, the central bank may well start to tighten overall monetary policy.
IBD: Are foreclosures and bad debt a problem?
Cheng: No. In 2009, about $700 billion in new properties were sold. Only 20% of the total value was financed by bank mortgage loans. Probably 60% of buyers are taking out some amount of mortgage. But the 40% paying in all cash are buying the more expensive properties.
IBD: What percentage of the 1.3 billion in population can actually afford to buy homes now?
Cheng: First of all you have to take out the farmers. Then you’ve got to take out the children and the elderly (who are not in the market). That will leave you with a 300 million working-age, urban population. The majority of them are still poor, granted. So the number of people who are in the market or hoping to buy something is probably about 100 million.
IBD: Where do you see the housing market going?
Cheng: China is adding roughly 1% of its population from rural areas to the cities — over 12 million people — a year.
China has the same total land mass as the U.S. but almost five times the population. And if you take out Tibet and all the mountains and the Gobi desert, then the amount of usable land is less.
And so what that means in the long run is that Chinese real estate will have to be more expensive relative to income than in the U.S. Land prices to a very certain extent determine housing prices. I just don’t see a long-term scenario where housing prices will be cheaper than they are now. Home Security Systems.
Tags: building china's, chinese real estate, housing market, recession, us lenders
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