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High Volatility in China's Real Estate Market

Jun 19, 2008
China has experienced a period of unprecedented growth in recent years. It is now the world's largest economy, mainly due to the sheer size of its population. However, a rampant economy is not always a good thing, and much effort recently has gone into slowing down the markets in China. What impact has this had on the real estate market specifically?

In a nutshell: china's property market has been slowing down considerably, however, this has not deterred long-term investors who see this as a favorable time to buy. Government initiatives have been behind much of the slowdown - tighter credit guidelines and other measures were introduced by the Chinese government last year, and they finally seem to be having an effect on the economy and Chinese real estate investment. In 2007, the interest rate was raised six times in an attempt to curb spending and tighten up on the economy generally. In more intricate measures, the minimum reserve ratio of commercial banks has been increased, and the tax system has undergone great change. Before these measures were introduced, property had been a runaway freight train, with property at the upper end of the market in high demand, and some prices up 50% in a very short time. Shenzhen, one of the more populous areas, had real estate prices inflated by around 20%. The peak of property sales was in November last year, and the numbers have been falling ever since, according to the governments index on the state of the Chinese real estate market.

However, these changes meant to impact the economy are having natural consequences for the Chinese real estate market. The numbers of transactions are dwindling, and prices are falling in many previously sought after areas. Bank loans have been drying up as the credit crunch has an impact, and to access other sources of funds now has increased price tags, due to higher demand and stricter criteria. All of this change adds up to a great volatility in the market.

Property developers are feeling the pinch. They usually rely on the cash from sales of unfinished projects to finance their basic operations and expand what they are doing. However, falling sales figures (despite the fact that official figures show that investment is up 32% from the first third of last year) mean that selling takes longer and is less reliable. Falling prices mean that when a property does sell, there is less in their pockets. All this adds up to a fear that a new crop of bad property loans is one the way - a similar situation to the US dilemma which has had impact on markets globally.

There is a huge 'but' in all of this discussion, though. Much like the situation where short term investors have been scared away by recent natural disasters, but longer-term investors have stuck around, those who are looking to cash in on the general upwards trend in the Chinese economy have not been deterred by this volatility. Real estate is traditionally quite a stable investment, if you have the time to see it appreciate. Long term investors apparently see this stage as a phase in the market stabilizing - people as a whole are getting richer, the economy is getting stringer, and all this fuels a need and demand for good quality homes. For these long term investors, the time to buy really is now.
About the Author
Gregory Smyth is an independent author providing assessment and comments on leading International Property Consultants in Asia and Greater China , especially CB Richard Ellis.
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