Thursday 12 March 2009
Housing Market Faces Huge Inventories, Unrecouped Funds, and No Buyers
“The central government must clearly order local government to focus on housing trade volume and force developers to cut prices, by use of policy incentive tools such as new land approval and development contracts for economic housing and low-rent housing. Whether the price cut is 20% or 30% is up to them!” said Li Daokui, director of the Center for China in the World Economy, at a session of the National People’s Congress and Chinese People’s Political Consultative Conference (CPPCC). A “traffic jam” has emerged in the real estate market, he says, affecting the promotion of internal demand for building materials, home appliances and insurance.
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Housing Market Faces Huge Inventories, Unrecouped Funds, and No Buyers
CSC staff, Shanghai
11 March 2009
“The central government must clearly order local government to focus on housing trade volume and force developers to cut prices, by use of policy incentive tools such as new land approval and development contracts for economic housing and low-rent housing. Whether the price cut is 20% or 30% is up to them!” said Li Daokui, director of the Center for China in the World Economy, at a session of the National People’s Congress and Chinese People’s Political Consultative Conference (CPPCC). A “traffic jam” has emerged in the real estate market, he says, affecting the promotion of internal demand for building materials, home appliances and insurance.
Demand has not disappeared in the real estate market, but most potential buyers, afraid that the housing prices will drop soon after their purchase, dare not take the leap. On the other hand, developers, anticipating macroeconomic and housing price rebounds, are unwilling to cut prices. Neither is budging.
According to Li Daokui, what China now needs is “traffic police”, and this must be the government’s role.
Premier Wen Jiabao recently called on the government to “maintain real estate market stability” in a government work report. Li says many local governments and developers have misunderstood “stability” to refer to trade volume instead of housing prices. He believes a decline in prices is already a basic judgment.
“The central government must release stronger signals for housing price cuts,” says Li Daokui.
Signals of economic rebound are emerging recently, but without the rebound of the real estate market it cannot be sustained.
Local governments, however, think differently from the central government. They are more concerned about supporting prices. If there is a decline, out goes an important source of local revenue, money from land transference.
Analysts believe that, to boost the real estate market, the central government must alter the present system of land transference fees as a money pot for local governments and adopt financial measures to balance the relation between house buyer, local government, and developer.
A report to the CPPCC by All-China Federation of Commerce& Industry makes clear the relationship between local governments and developers. 49.92% of total housing development fees have flowed to local governments in the form of land transference and tax revenues.
Low trade volumes and continuing development have brought about a serious supply surplus in the market. “Housing inventory has become the largest obstacle for development,” said Lu Keng, chairman and CEO of Qingdao Haier Real Estate Group Co. Ren Zhiqiang, Huayuan Group Chairman, predicted that without more favourable policies, vacant housing may reach 400 million to 500 million square meters by the end of this year.
Estimates of land inventory vary, but none paint a rosy picture. DTZ, a global real estate advisor, reports that, from 1998 to 2008, land area taken for real estate development reached 3.13 billion square meters. But by the end of 2008, only 1.94 billion square meters had actually been developed, meaning developers’ land inventory totalled about 1.2 billion square meters.
Reports from the China Construction Bank and Financial Research Center of Beijing Normal University estimated China’s land inventory to be 900 million-1 billion square meters at the end of 2007.
According to the latest National Bureau of Statistics figures, from January to November last year, developers nationwide bought 320 million square meters of land and developed 210 million square meters only, leaving another 110 million meters of new inventory land.
And Huayuan Group’s Ren Zhiqiang says “Now total inventory land has reached 360 million square meters.” This is probably close to correct, since inventory land totalled 270 square meters at the end of 2007 and increased by about 100 million square meters in 2008. “If local governments’ potential land offers are taken into account, total potential housing supply would exceed 2.4 billion square meters,” said Lu Keng. It would take more than 10 years to sell that amount of housing.
Present new housing inventory is already putting heavy pressure on the industry. “By the end of February vacant commercial housing was expected to grow from 136 million square meters to 200 million square meters, with 250 million square meters to 300 square meters more this year. Without further policy stimulus, it may reach 400 million to 500 million square meters this year,” predicted Ren Zhiqiang.
Inventories lead to fund shortages and depreciation. By the end of 2007 about 2.9 trillion yuan in investment in the real estate market had gone unrecouped. That number will certainly have grown with the land inventory growth in 2008.
“About 170 million square meters of land among 360 square meters of total inventory land was bought at extremely high prices,” said Ren Zhiqiang. At current price levels, it can’t be utilized.
Ren Zhiqiang said at the end of last year that if the commercial housing inventory reached 400 million square meters, unrecouped funds would reach 1.2 trillion yuan for the year.
With inventory land worth at least 2.9 trillion yuan and inventory housing valued about 1.2 trillion yuan, total inventories in the real estate industry may reach over 4 trillion yuan.
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