WHAT’S NEXT
088 China
Real Estate: as 3%. After five years of tighten-
A Spreading Sinkhole
China’s all-important property values are plunging,
hammering consumers and local governments
By Frederik Balfour and Chi-Chu Tschang
Autumn is usually the
busiest time for real estate
salesman Wang Yaodong.
Last September and October, for
instance, he sold more than a dozen
luxury townhouses in western Shang-
hai, but this year he has sold only one.
“Everybody is waiting for prices to
fall,” Wang says.
Wang’s lament is a common refrain
in China these days. During the Golden
Week holiday in early October, nor-
mally peak season for home buying,
sales in the southern city of Shenzhen
fell by a third from the previous week
and the average selling price was nearly
halved. In Beijing,
software developer High-rises going
up in central
Answer Li has been China: Real estate
looking at houses accounts for 25%
in the $100,000 to of all investment
$200,000 range,
but he’s holding off because he fears
further declines. “I don’t dare take the
plunge and buy a home,” Li says.
Across China, property sales fell 15%
in August over the previous year. In
Beijing, they’re off more than 55% and
in Shanghai 39%, reports the National
Bureau of Statistics. Prices across the
country registered a slight decline in Au-
gust, the first time in years they haven’t
increased. In the south, where the
downturn began last year, prices are off
by 30% in the past 12 months. “There is a
big likelihood that next year will be even
lower,” says Li Yong, general manager of
real estate brokerage Century 21 China in
Changsha, an industrial city 700 miles
west of Shanghai.
That’s a dramatic shift. Since 2005,
BUSINESSWEEK I NOVE M B E R 3, 2008
Beijing had sought to rein in housing
prices with measures such as manda-
tory down payments of at least 30%
and a steep tax on profits earned from
flipping homes within five years of
purchase. Now those measures are
starting to bite and—with economic
growth slowing and the stock market
down by more than 60% this year—
there’s less demand for housing than
developers had anticipated.
easing the rules
Now Beijing is scrambling to keep
prices from falling too fast. On
Oct. 22, the government exempted
land sales from the value-added tax,
cut down payments for first-time
home­buyers to 20%, from 30%, and
slashed a property transfer tax for
new buyers to 1%, from as much
ing credit, the central bank has cut
interest rates twice in the past two
months and eased reserve require-
ments at banks to promote more
lending. And some cities have intro-
duced subsidies for buyers of small
homes and allowed mortgages of up
to 30 years, compared with a previ-
ous maximum of 20 years.
A prolonged drop in property prices
could create big problems for China.
Real estate accounts for 25% of all
investment and
about 10% of gross
domestic product in
the mainland, about
double the level in the
U.S. Cities in China
often pay for infra-
structure by selling
land to developers
and property-related
income accounts for
as much as a third of
government spend-
ing, brokerage Merrill
Lynch estimates.
“Beijing cannot af-
ford a collapse in the
housing sector,” says
Jing Ulrich, chairman
of China Equities at
JPMorgan in Hong
Kong.
The slowdown in
sales already is tak-
ing a heavy toll on China’s more than
60,000 developers. Many borrowed
heavily to finance growth as real estate
values skyrocketed. Now, with prices
headed south, dozens have gone belly-
up in recent months. Typical of the
more troubled companies is Zhejiang
Zhonggang in the eastern city of Jin-
hua. Its chairman skipped the country
in October, leaving behind some $20
million in debt and dozens of angry
families locked out of homes they had
paid for. (The company couldn’t be
reached for comment.)
“Next year is looking very tough,”
Bobby Yip/Reuters
says Christopher Lee, director of
corporate ratings at Standard & Poor’s
in Hong Kong. “We could see some
high-level defaults.” ^