As
China’s housing market took a turn last October, the decline in housing prices
has widened and deepened.
December
statistics show that out of the twenty three cities that the Soufun website—China’s
leading real estate Internet portal—follows, housing prices have declined in
all cities but one. Among them, ten fell more than ten percent from their highs
in 2011.
Shanghai
experienced the largest drop in housing prices, declining 18 percent from its
high in February 2011, followed by Wuxi at 15.1 percent, Shenzhen at 14.3
percent, and Chongqing at 13.3 percent. Beijing fell 10.9 percent. The only
city among the twenty three cities that did not fall is Kunming, which actually
rose 22.7 percent in December compared with January 2011.
Percentage Change in December Housing Prices
Relative to 2011 Highs
Still Too High
Even
though housing prices in Shanghai dropped the most, prices remain extremely
high in some areas and refuse to adjust. In the Jiali Huating area, located in
the inner circle of Shanghai, the average price for apartments of the second
phase project is as high as 120,000 yuan/sq meter as of Jan. 27, 2012. (source:
jialihuating.soufun.com) The apartments are
in high rise buildings. At the current exchange rate of 6.3138 yuan/dollar, the
average price is equivalent to $1,766/square foot, which is 17 times as much as
for the average housing price of $101.3/square foot in the United States. (The
average U.S. house cost $242,300 in October 2011, and the average size of a U.S.
house was 2,392 square feet as of 2010.)
However,
even though they are so expensive, such apartments in high rise buildings are
pretty hot. Three hundred and seventy-four such apartments have been sold. In
fact, prices for such luxurious apartments rose 50 percent in December 2011
from the previous month!
Some
of the richest in China do not care how much housing costs, and cash is no
problem for them. The income gap has been widening after the economic reform,
and the widening has accelerated, especially in recent years. Housing and land
policies, along with other macroeconomic policies, have only served to widen
such gaps.
Both Land prices and Profit Margins Dropped
Land
prices and profit margins dropped about two years ahead of the residential
housing market.
Land
has become a hot commodity in the past decade. Land prices in China reached their
highs in 2009 but have declined ever since. On average, the land price per
floorage sq meter for the 100 cities sampled by soufun.com reached 1,844 yuan
(US$293). It declined 5.2 percent in 2010, and another 11.5 percentage points in
2011 to 1,545 yuan sq m (US$245). As a result, the land price per floorage sq m
dropped 16 percent between 2009 and 2011.
Similarly,
the profit margin on land value per floorage sq meter also declined with the
same pattern. The average profit margin for the 100 cities reached its high at
53.5 percent in 2009. Since then, it has declined drastically. The annual
profit margin was down to 11.4 percent for the year of 2011. The average profit
margin declined quarter after quarter to a mere 3.3 percent in the fourth
quarter of 2011. That is the lowest profit margin on record in China.
Land Prices Dropped in All 5 Regions
China
is usually classified into five economic regions. The Yangtze River Delta
Region, an area centered around Shanghai, is the most economically advanced
region. It had the largest drop in profit margin on land price/floorage,
slashing 27.3 percentage points (ppts) from 44 percent in 2010 to 16.7 percent
in 2011, though this profit margin still remains the highest among the five
economic regions. The Northeast Region, where the profit margin was the lowest,
had the smallest cut in the profit margin of 2.5 ppts. The other three regions,
Pearl River Delta Region, the Midwest Region, and the Bohai Sea Region, each suffered
declines of over 20 ppts in the profit margin.
| China's Profit Margin on Land Price Per Floorage | ||||
| 2010 | 2011 | PPTs Change | ||
| Yangtze River Delta Region | 44.0% | 16.7% | -27.3 | |
| Pearl River Delta Region | 33.3% | 12.4% | -20.9 | |
| Midwest Region | 31.5% | 11.0% | -20.5 | |
| Bohai Sea Region | 29.4% | 7.0% | -22.4 | |
| Northeast Region | 5.7% | 3.2% | -2.5 | |
| Source: soufun.com | ||||
The
profit margins fell even more in the ten largest cities than other cities in
2011. For the three large cities of Shanghai, Beijing, and Guangzhou, the profit
margins dropped more than 50 percentage points from 2010 to 2011. Shenzhen’s
profit margin was completely wiped out in 2011 from seventeen percent a year
ago.
| Falls in Land Price Per Floorage Sq M | |||||
| Ten Large Cities in 2011 | |||||
| 2011 | Change | 2011 | 2010 | ||
| City | Price in Yuan | Year/Year | Profit Margin | Profit Margin | |
| Beijing | 5,088 | -30.5% | 9.0% | 64.8% | |
| Shanghai | 3,996 | -39.8% | 18.4% | 79.7% | |
| Guangzhou | 3,393 | -38.9% | 4.6% | 78.7% | |
| Shenzhen | 3,618 | 23.9% | 0.0% | 17.7% | |
| Tianjin | 2,187 | 1.9% | 4.0% | 12.7% | |
| Hangzhou | 6,198 | -4.3% | 27.4% | 50.6% | |
| Nanjing | 2,958 | -45.8% | 2.5% | 33.4% | |
| Wuhan | 1,904 | 9.9% | 1.2% | 16.9% | |
| Chongqing | 1,929 | 12.8% | 7.7% | 25.0% | |
| Chengdu | 1,754 | -7.5% | 11.0% | 37.1% | |
| Source: soufun.com | |||||
Vanishing Developers
As
might be expected, the fall in land and apartment prices means that the real
estate sector has entered a bust period.
According
to the Beijing Municipal Commission of Housing and Urban-Rural Development, as
of Dec. 19, 2011, 473 real estate developers in Beijing did not renew their
certificates of qualification or business licenses. According to the
regulations, these 473 land developers can no longer do the business in
Beijing.
At
present, Beijing has about 3,000 real estate developers with valid certificates
of qualification. Therefore in 2011, about 15 percent of real estate developers
either went bankrupt or switched to other businesses. Compared to 185 companies
that revoked their certificates of qualification in 2010, 2011’s number was up by
156 percent.
Statistics
from Beijing National Land Department show that in the past few years, the
number of public sales of commercial land was around 200 in Beijing. This means
that an average developer will take 15 years to acquire another piece of
commercial land. Yet within five years there will be only 1,000 sales of
commercial land, so only 1,000 developers may get a piece. By the end of the
next five years, it is likely most developers will have finished whatever land
they have in hand. Those 2,000 developers (=3,000-1,000) that will not get a
lot will be out of the real estate business by then.
Given
that the number of land sales for residential purposes was only 59 in 2011,
less than half of 2008’s number, it is reasonable to assume that fewer than 100
sales of commercial land will be taken each year. Thus, in five years, we may see
2,500 out of the current 3,000 developers out of the real estate sector.
Tianlun Jian, Ph.D., writes
regularly on the Chinese economy.
Note: This article was first published on the Epoch Times on February 13, 2012 with a slightly different title: Land Led Decline in China's Housing Markets.