As China acts to cool property frenzy, volatility spurs new risk

[SHANGHAI] China's use of administrative measures to control property prices can have painful repercussions for its swelling ranks of homeowners. Just ask Shanghai resident Yi Miaowen.

Mr Yi had to cut the price of the apartment he was selling by at least 8 per cent after local authorities in March restricted purchases by non-residents, causing two prospective buyers to pull out.

"I needed the money ready within two months to pay for a larger apartment I just bought," said the 42-year-old engineer, who sold his apartment for 5.31 million yuan (S$1.09 million).

"The buyers spotted my weakness and then asked for lower prices."

Chinese officials' efforts to control price swings in markets from equities to commodities often end up stoking volatility rather curbing it. Lately, that's been in evidence in the property sector, where the government has stepped up intervention in the past 18 months - first to stimulate demand in smaller cities and more recently to cool a buying spree in bigger hubs such as Shanghai and Shenzhen.

Tighter policies contributed to the slowest growth in new home sales this year in May, data released Monday showed.

An unintended consequence of the administrative measures is that they tend to fuel speculative housing-market behavior as buyers and sellers try to anticipate what the government will do next.

Among consumers, that involves borrowing online for home down-payments or faking a divorce to get around buying restrictions. Developers aren't immune to risky behaviour either, sometimes bidding so fiercely at land auctions that authorities shut the sales down.

"Policy adjustment in China is not only more frequent, but also more systematic,'' said Zhu Jing, a Shanghai-based analyst at Orient Securities Co. "It has forced developers and buyers to either act aggressively or lose out in the game. The supply-demand dynamics have just become more volatile.''

The upshot is that property-market risks are rising just as China's government is trying to steer the economy away from credit-fueled growth. With memories from last year's stock market crash still lingering, officials are being more vigilant in monitoring home prices, according to Patrick Wong, senior real estate analyst at Bloomberg Intelligence in Hong Kong.

"Last year, you saw the A-share price bubble, and this year you're seeing the property price bubble" in the largest cities, Mr Wong said. "The stock market had a hard landing; this time they will try to ensure that there is no hard landing."

By developed-world standards, China has a short property-market history. The nation didn't allow private home ownership until 1998, and except for a brief dip during the global financial crisis, prices have steadily risen, driven by economic growth and urbanisation.

Prices surged almost threefold from 2000 to 2014, according to the latest official data from the statistics bureau.

After more than a decade of soaring prices, the central government in 2010 introduced a raft of tightening measures. By November 2014 though, signs of slowing economic growth and a glut of unsold homes in second-tier cities prompted China to shift gears again, with a stimulus package that included six interest-rate cuts over the next 11 months and the easing of some down-payment requirements.

That's left authorities grappling with a new problem: the stimulus sent prices soaring in major cities like Shanghai and Shenzhen, prompting some city officials to warn against "panic buying."

In Shenzhen in the south, prices jumped about 62 per cent in April from a year earlier. Mortgage borrowing has increased rapidly nationwide.

In Shanghai, prospective buyers thronged real estate agents and clogged traffic earlier this year, prompting police intervention to restore calm. Peer-to-peer loans became a popular way to finance down-payments, triggering a government crackdown.

Buyers even resorted to phony divorces, according to city officials, a tactic that emerged three or four years ago to skirt limits on the number of homes each household can own.

"Frequent policy intervention gives Chinese buyers stronger animal spirits - they act together like a herd," said Alan Jin, a Hong-Kong based analyst at Mizuho Securities Asia Ltd, said.

Developers responded by feverishly bidding for land, only to be faced with controls abruptly imposed by local governments. City officials in Suzhou, a 30-minute train ride from Shanghai, have terminated some land auctions after bidding reached levels more than double initial asking prices.

The surge in land prices has led to what Deutsche Bank AG calls a "severe side-effect" for developers. The cost of buying land in prime markets is now higher than what an average home sells for, while in second-tier cities it's almost half, according to Deutsche Bank analysts led by Tony Tsang.

The resulting increase in debts and pressure on margins prompted a warning from S&P Global Ratings last month.

Shanghai, where transaction volumes plunged and prices fell 6 per cent in the 30 days after the city introduced the tightening measures, may offer a glimpse into the magnitude of declines authorities are willing to stomach.

Yet any policy-induced price rebound would be too late for homeowner Mr Yi, who was forced to withdraw 400,000 yuan from his brokerage account and had to dip into his savings for another 60,000 yuan to help cover the price gap to buy his new home.

"This is what it costs you with ever-changing policies," Mr Yi said. "I wish I had delayed the purchase of the new home. Being a Chinese investor, you just have to be more sophisticated."

BLOOMBERG