City's housing market caves in after a doubling of prices and a run-up fueled by speculation, writes Don Lee
Tuesday, January 10, 2006
Los Angeles Times
Once one of the hottest property markets in the world, Shanghai has seen sales of homes virtually halt in some areas, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.
For the first time, Shanghai homeowners are learning what it means to have an upside-down mortgage, when the value of a home falls below the amount of debt on the property. Recent homebuyers are suing to get their money back. Banks are fretting about a wave of default loans.
"The industry is scaling back," said Mu Wijie, regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones would not stop ringing a year ago, say their incomes have plunged 67 percent.
Shanghai's housing slump is only going to worsen and imperil a significant part of the mainland economy, said Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.
Although the city's 20 million residents represent less than 2 percent of China's population of 1.3 billion, Xie said, Shanghai accounts for an astounding 20 percent of the country's property value. One million homes in Shanghai alone are under construction.
"They'll remain empty for years," Xie said, adding a jolting comedown also is in store for other cities with building booms, including Beijing, Chongqing and Chengdu, though other analysts say the problem is largely confined to Shanghai.
Shanghai's housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation.
With the economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up.
At least 30 percent to 40 percent of homes sold were bought by speculators, said Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.
"Ordinary people had no option but to follow the trend. Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible," Zhang said.
The government only pushed the market higher, he added. "Many of the officials said Shanghai's property market was healthy and wouldn't drop before the World Expo" in 2010.
For Wang Suxian, a tale of two lines illustrates how the bubble has burst.
When home prices were at the tail end of the boom in March, Wang hired two migrant workers to stand in line for a chance to buy units in what the developer said was modeled after an apartment community on New York's Park Avenue.
The workers waited 72 hours, and came away with two apartments, one for US$110,000 (HK$858,000), about the average price for a new home in Shanghai, and another for US$170,000.
And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring.
But today, prices at the complex have fallen by 33 percent, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.
She stood in a line herself with about 40 other buyers outside the builder's headquarters, demanding that it negotiate a deal to return their money. "This is ridiculous," Wang said.
The company, Da Hua Group, invited the homeowners inside, served them hot tea, then told them to forget it.
"I think it'll take at least three years before the property market becomes healthy again," said Zhu Delin, a finance professor at Shanghai University and former head of the Shanghai Banking Association.
The typical home being built is in a high-rise complex, with two bedrooms and 850 square feet of living space. Developers say many of Shanghai's homes are valued at about US$70,000 or less, and price drops have not been as steep for those units.
Some still see promise in the Shanghai market. Incomes are rising and people are relocating from the inner city to outlying areas, said Richard David of Macquarie Property Investment Banking China in Shanghai.
What's more, he says, the Shanghai government which owns all the land has auctioned off few lots in the past two years, which will limit the number of housing units in the future.
But that's little solace for homeowners who have seen inventories rise even as buyers show no hurry to come back into the market.
People are blaming the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases.
Banks were ordered to raise their best rate on home loans to 5.5 percent from 5 percent. Homebuyers were required to make down payments of at least 30 percent, up from 20 percent. A 5.5 percent capital gains tax on sellers' profits was imposed.
Beijing also levied a 5 percent tax on the sale price of homes sold before two years of ownership.
"It's killed the speculators," said David Pitcher, the former head of CB Richard Ellis' office in Shanghai.
Before the market swooned, buses would bring investors from the southeastern coastal city of Wenzhou in Zhejiang province on home-buying missions. They no longer come.
Wang, the woman battling Da Hua, is one of tens of thousands of Shanghai homebuyers from Wenzhou, known for its wealth and business prowess.
But it's not just speculators who have bailed out of the market. A lot of potential Shanghai buyers have been scared off by numerous reports of sinking home prices and desperate action by some owners.
Internet chat rooms recently were abuzz with a story that a Taiwanese man had jumped from the 33rd floor of an apartment tower. Many people suspect that he killed himself because he was drowning in debt after his home investments went sour.
Managers at the complex refused to comment, but brokers indicated the price of some units in Shanghai have plummeted by more than 50 percent since March, when a home fetched as much as US$250 a square foot.
Zhang Wei, an editor at Imagine China, a photography agency, was close to buying an apartment in the new Pudong development area last year. He planned to use his US$1,250 in savings, and his parents - a policeman and a doctor - agreed to contribute about US$30,000.
The family of three currently lives in a 550 sqft apartment in an industrial district that was provided by his father's employer, the Police Bureau.
Zhang walked away from the deal after the central government stepped up its campaign to cool Shanghai's market. He noticed prices beginning to drop.
"When two of the four real estate agencies near our home finally closed, I decided not to buy for at least two years," he said. "Even a 1 percent drop in prices is a lot of money for us."
For Shanghai, prolonged weakness in the housing market could be very painful. It relies heavily on real estate to drive its economy. Morgan Stanley's Xie says property sales directly accounted for about half of US$31 billion of the growth in Shanghai's annual economic output from 2001 to 2004.
Construction cranes still fill the skyline of Shanghai, an area of about 5, 700 square kilometers. But there's sparse development in the center of the city, where strong sales of high-end homes and luxury office suites, in large part by foreigners, belie the losses around it.
Shanghai's government is relocating inner-city residents to new suburban areas, where entire towns are going up as part of a plan to build distinct industries that ring the city.
It's unclear how many of these new homes are sitting empty. Sales and inventory figures aren't provided by the government. But analysts say they can see the surplus of housing when they drive past housing complexes and there are few lights on at night.
Few analysts are betting on a quick turnaround. Yin Zhongli, an economist at the Chinese Academy of Social Sciences in Beijing, says a housing crash takes time to clean up. He worries that the financial sector will be crippled by the real estate fallout.
Last year, he said, 76 percent of all bank loans in Shanghai were in real estate. "Now is the time to swallow a bitter pill," Yin said.
That's what Huang Xiaolei is doing. The Shanghai native nabbed a 1,700 sqft apartment from Da Hua during the heady times last spring. The unit would not be completed until the end of the year, but as is customary in China, Huang had to secure a loan and make the down payment right away.
She and her parents pooled their life savings of about US$80,000 and put 30 percent down on the US$270,000 flat.
In April, they began making monthly mortgage payments of US$1,100 on a 30-year loan with a 5.5 percent interest rate.
In November, Huang stopped the monthly payment, and this month she filed a lawsuit against Da Hua, claiming her contract allowed her to rescind the purchase before the house was completed under special circumstances, with a 3 percent fee.
"We have over 40 cases like this at our firm," said Du Yuping, Huang's lawyer.
Huang regrets that she got caught up in the frenzied market, and says that even if she wins the lawsuit, she'll suffer a hard financial loss.
"I was cheated," she said.>
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