China Home Prices Seen Dropping More

Source : The Business Times, July 9, 2008

Citic Ka Wah Bank cites weak demand, govt unlikely to ease up loan restrictions

(SHANGHAI) Property prices in China will fall further because demand is weak and the government probably won't relax restrictions on home loans, according to Citic Ka Wah Bank chief economist Liao Qun.

Losing lustre: Falling home prices in Shenzhen and Beijing have raised concerns that an asset bubble burst may leave China's banks with more non-performing loans

'Policy targets with respect to the property market are still some way from being reached,' Mr Liao said at a press briefing here yesterday. 'The adjustment of the market is set to continue into 2009.'

China's government is seeking to rein in soaring property prices to help slow inflation from an 11-year high. It raised interest rates on mortgages for second homes and increased the minimum downpayment to 40 per cent of the sale price last September.

The central bank also told commercial banks to further tighten mortgage lending last December. Under new rules, loan applications for the purchase of a second apartment are counted by household instead of by individual.

Housing sales in China fell 0.4 per cent to 136.6 million square metres in the first four months of 2008 from a year earlier, according to the National Development and Reform Commission (NDRC). Home prices in 70 major cities rose 9.2 per cent in May, the smallest gain in eight months.

First-tier cities including Shenzhen, Beijing, Guangzhou and Shanghai will face more downward pressure on prices than smaller cities because of oversupply, according to Mr Liao.

The economist said he expects home prices to fall a further 10-15 per cent in Shenzhen, where average prices had already dropped 36.5 per cent between last October and May this year. Prices in Beijing and Shanghai are likely to fall 10 per cent over 12 months.

China Vanke Co, the country's largest publicly traded real estate developer, said on Monday that apartment sales fell 22.8 per cent in June from a year earlier.

Falling home prices in Shenzhen and Beijing have raised concerns that an asset bubble burst may leave China's banks with more non-performing loans. The banking regulator warned lenders in May against a potential rebound in bad loans amid tighter credit controls and rising inflation.

Property-related lending gained 30 per cent annually in the past two years in China - twice as much as overall loan growth, according to Moody's Investors Service. Some builders evaded lending controls by indirectly accessing bank financing, it said.

The central People's Bank of China and government ministries held talks on stabilising real estate prices, and may make financing easier, the Beijing-based Economic Observer reported on July 5, citing a person it didn't identify. A decline in property prices will erode demand and disrupt economic growth, the newspaper said, citing an NDRC report.

Mr Liao said yesterday that he doesn't expect the government to relax rules on real estate financing soon. 'With excess liquidity still prevailing, the government would be concerned that an early relaxation of tightening measures would result in an undesired quick rebound in the market, negating the previous tightening efforts,' he said. -- Bloomberg