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China makes headway in cooling housing market

Workers clean the windows of an apartment block at a residential area in Beijing May 9 2012.


For middle-class Chinese, buying a first home in the country's previously roaring property market is slowly falling back within reach.

Property prices fell again across most of China in April, as central government regulators intended, down year-over-year in 46 of 70 major cities across the country.

Homes in Wenzhou, scene of a local debt crisis last fall, fell hardest, down 12.3 per cent from this time last year. Homes in top-tier cities Beijing and Shanghai were also cheaper, down 1.0 and 1.3 per cent, respectively, from last year.

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Government regulations that have slowed the market are seen as risky by many economists, some of whom – following a wave of dismal month-end results on imports, exports and industrial production – are now busy revising their forecasts down for China's growth this year. Goldman Sachs cut its forecast for the year this week to 8.1 per cent from 8.6.

Still, Chinese officials are pledging to continue their strict home purchasing regulations. The regulations vary from city to city but generally limit purchases to those with permanent residency permission, or hukou, for the city, as well as restricting purchases of multiple properties.

"We will keep our severe crackdown against investment and speculative housing demand," Zhang Xiaohong, vice-head of property market supervision at the Ministry of Housing, was quoted as saying to news portal "We must firmly stick to the tightening measures, further strengthen our achieved results and drive home prices back to a reasonable level."

At stake is the role of the housing market in China's economy. The real estate market made up about 13 per cent of GDP last year; it's seen as the best and safest investment in a country with an immature financial market and notoriously volatile stocks, and was heading for a bubble when government introduced the regulations last year.

Now that property bubble is deflating fast, although some economists say the market is still overvalued. More importantly, though, restricting property prices to try to keep them within reach of China's rising middle class is seen as key to preserving political stability. For an authoritarian regime obsessed with maintaining a harmonious society, this has been a relatively dramatic year of labour protests, self-immolations by Tibetan activists, continuing food inflation and then a political scandal involving the murder of a British businessman that felled one of China's most popular politicians.

All of this comes ahead of an expected transfer of power at the top that is supposed to begin with the Communist Party's national congress in October. "You can make a pretty strong case that it's overvalued, the property market, so I personally don't think there will be any reversal … I think they'll hold the line," said Alaistair Chan, China economist with Moody's Analytics. In some cities, he pointed out, there has been something of a recovery even without policy change; last December, about 49 cities saw falling prices, compared with the previous year, which means a few cities are already seeing prices stabilize.

Still, some property developers are settling in with what they have, and downgrading any ambitions of big acquisitions.

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"In the rest of this year till early next year, there will be no big changes in China's property policies," Freddy Lee, the chief executive officer of Chinese property developer Shui On Land, told Reuters this week. Though he said he expected home buying to pick up later this year, prices are likely to continue to fall 5 to 10 per cent before year's end. "Currently we don't have any plan to buy land, as we have enough stock in hand."

There may be some relief to the restrictions later this year, but – in typically Chinese fashion – these are likely to begin sliding away almost without notice. The restrictions, imposed by China's central government, have been challenged multiple times by regional governments for whom land sales to developers are a major source of income.

So far, each time a local government has tried to relax the policy, it has been quickly reversed. But later this year, that may not be the case.

"From a political point of view, it's very difficult to make large changes to anything. Even with monetary policy, it's difficult to make large change. … Too much change has happened in the past and people are losing confidence, they are getting tired of it. The best policy is to leave it where it remains now," said Zhu Guozhong, an assistant professor specializing in real estate at Beijing University's Guanghua School of Management, who nonetheless predicts the property market is nearing a plateau that could leave room for some loosening.

"The central government also doesn't have to do anything. The local governments will try to relax the central government policy until the central government says stop. … In the third quarter, you may see more implied relaxed control on the property market."

Special to The Globe and Mail

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