China's Own Version of the Real Estate Bust

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Shi Li / Imaginechina / Zuma

A real estate agent, right, talks with a potential customer in front of advertisements for apartments at a house fair in Beijing.

"Real estate price war!" the headline in a local paper blared. "Prices continue to move lower." It's a "great time to be a buyer," another story reads. If there was something plaintive about those stories, it is because buyers seem to be in hibernation these days. In a report published earlier this month, the country's central bank said the "number of residents willing to buy a home in the next three months is at a record low."

If you think this is the latest, depressing tidbit from the historic real estate bust in the United States, think again. The other former global growth engine — China — which saw its own real estate bubble expand in the last five years, has now got its own property market problems — and they're intensifying. (See pictures of Beijing's changing skyline.)

The long-running boom in the construction of new apartments and houses across urban China ended abruptly last year and is now unwinding. Deflation is evident in Beijing and Shanghai in particular, where real estate developers and brokers report prices will likely be down 15% to 20% this year. Prices in the once booming city of Shenzhen are down more than 18% from year-ago levels. Nationwide, according to a recent forecast by economists at the Chinese Academy of Social Sciences, housing prices in China may decline 10% to 15% this year, as the overall economy struggles amidst the global financial crisis. "Housing prices far surpassed the actual incomes of the general public" over the last five years says CASS economist Chen Xigang. "They are now correcting."

That's a chilling echo of what happened in the United States over the last decade. But there are important differences in the two markets. For one thing, Chinese by law must have "skin in the game." The absolute minimum down payment on a new house or apartment is 20% of the purchase price, and for most buyers it's usually closer to 30%. And a large percentage of Chinese — upwards of 40% according to some estimates — pay cash for new apartments, because in a high savings economy, housing is widely seen as a safe investment. That means, in China, you don't have the real estate equivalent of "dine and dash": people don't abandon houses the minute they think the price level is lower than what they paid, leaving it to the mortgage company or the banks to sort out. There's no sub-prime, zero-percent-down U.S.-style debacle here.

But there is still pain — particularly among developers, and the big banks that financed them — because of just how overbuilt urban China has become. Ren Zhiqiang, the Chairman of the Beijing Huayuan Group, a large developer, estimates that it may take to two to three years to work off the existing inventory in residential property across the country. Analysts estimate that there are now about 200 million sq m of constructed but unsold apartments and houses in China, and Ren worries that figure will continue to rise without "tangible, positive incentives" for new buyers. (See pictures of China's demographic patterns.)

Unfortunately for developers like him, that does not appear to be forthcoming. The central government, in the just completed National People's Congress, offered new subsidies only to create more "affordable" housing for lower-income citizens and stiffed the more high-end developers, despite a fierce, behind-the-scenes campaign to press for help among big property developers. In fact, the outcome — more subsidized housing (about $4.8 billion worth) for relatively low-income citizens — is exactly what most developers didn't want to happen, because they look at the lower cost housing as just more competition in an already glutted market.

The prospect now is that the deflation evident in the housing market may intensify. As Zheng Jia, 35, who sells medical equipment in Shanghai, said after a weekend looking at villas in suburban Shanghai: "Why buy now, when prices may be lower a month from now?"

For the Chinese government — and indeed, the global economy — a gathering deflationary bust in real estate is a big problem. So-called fixed asset investment accounted for 40% of China's GDP last year — an extraordinarily high figure — and real estate, both commercial and residential, accounted for about one-fifth of that. Given that vacancies among office buildings are also rapidly rising now, this means that one of the prime drivers of growth in China has shifted into reverse.

Consider recent apartment buyer Hong Chang-Ying, who owns and runs a small electronics store in central Shanghai. She bought her apartment in Shanghai three years ago for the equivalent of about $80,000, and was "sure she could sell it by now at a profit, and buy a bigger place." Ask her if that plan still holds, and she just laughs. "I have no idea now what my place is worth now — and I don't intend to find out, because I'm not going to sell into this market." China may not confront the disastrous effect that huge numbers of foreclosures have had on real estate prices in the U.S., but its own problems are bad enough — and they're not getting better anytime soon.

China's Consumers: Not Ready to Save the World.