Real estate market in China likely to see major investment swings this year

It is no exaggeration to say that China has the largest and the most eye-catching real estate market in the world. In the past year, the real estate market has experienced dramatic changes, with a cold market at the beginning, a strong wait-and-see mood mid-year and then a hot market at the end. The question is, what will the market be like this year?

I firmly believe that it will not witness the hard landing predicted by American economist Nouriel Roubini and Chinese economist Xie Guozhong. Instead, it will see a new round of price hikes. More importantly, the market structure will also undergo several rapid changes.

Recovering market

The financial crisis in the US since 2008 has been an important factor that has swayed the real estate market in China. Taking this into consideration will help us understand the logic behind the fluctuating market performances.

To withstand the impact of the crisis, the Chinese government implemented fiscal and monetary policies in 2009 and 2010 to ensure economic growth and employment. While successfully resisting the crisis impact, these policies also resulted in an overheated economy. Curbing the excessive increase in housing prices and commodity prices hence became the top priority for the government by the end of 2010.

In 2011, the government released tough real estate regulation and control policy. On one hand, it put purchase restrictions on property in big cities with high housing price rises, such as Beijng, Shanghai and Shenzhen. On the other hand, it also started an unprecedented big low-income housing construction plan to increase the supply. The regulation soon reversed people's expectation for the market.

By the end of 2011, housing supply exceeded demand. Slow market and the real estate developers' lack of funds brought property prices in some cities down noticeably, especially where purchase restriction was applied. The opening prices of some new buildings decreased by 20 to 30 percent. This situation continued until the second quarter of 2012.

At that time, China's economy was beset with difficulties at home and abroad. In the absence of any major improvement in the global economy, overseas demand for Chinese products continued to remain weak, while domestic demand was hit by one and a half years of tight financing. For the first half of 2012, the growth rate of China's GDP decreased for six consecutive months. In the second quarter of 2012, it dipped below 8 percent.

Strict purchase restrictions on property and decreases in housing prices also resulted in a quiet land market. Land parcels failed to sell at auction, and thereby put a strain on local government finances.

Under these circumstances, the government transferred its macroeconomic control goals back to guarantee economic growth and employment starting from the second quarter of 2012. The central government gradually eased monetary policy, and local governments gradually made adjustments to the purchase restriction regulations. About 40 cities in China have issued documents to make adjustments to their real estate policies.

Under the relatively loose credit requirements, the policies boosted consumer confidence and helped the market boom again. Last July, housing prices in 70 cities saw a month-on-month increase for the first time.

By November and December, in first-tier cities such as Beijing and Shanghai and second-tier cities such as Chongqing and Xiamen, some buildings were sold out on the opening day as buyers believed that housing prices may firm up again in the long term. These changes indicate that China's real estate market will finally exit the two-year bear market, and see another round of price increases. As the government's goals are to ensure economic growth and employment, the recovery of the real estate market will be a major keyword this year.

New policies anticipated

Sudden and sharp price increases and declines have been an intrinsic feature of the real estate market. For the past two decades, the government has often been confounded by an embarrassing situation - that is, if they take controlling measures, the market will stagnate, whereas it tends to become chaotic in the absence of any intervention. Although the government will continue to stand by its regulations and controls on the real estate market, the same cannot be successfully implemented by local governments, as they are unable to reduce their financial dependence on land sales.

The price increases in July, however, did evoke response from the government. The State Council sent supervision groups to 16 provinces and cities to examine the implementation of the regulation and control policies. Expecting new regulations and policies, most potential purchasers adopted a wait-and-see attitude, and new policies are anticipated after the supervision groups handed in their examining reports.

However, the anticipated measures did not come out in October, and many hesitant purchasers entered the market and subsequently the prices went up again.

Meanwhile, other incidents also helped heat up the market. With the recovery of real estate market, many cities were quick to sell land at high prices. The government's emphasis on urbanization was good news for developers and they subsequently hiked property prices.

By December, land prices had firmed up again with some land parcels going for sky-high prices amid the frenzy to snap up key property in major cities. This indicates that the excessive price hikes may continue for some time.

The government's goal for the property sector, however, does not mean that it will turn a blind eye to price hikes. If housing prices continue to go up in big cities this year, I think a new round of regulations and controls will come out before March.

Segmented market

China's real estate market will see changes across different regions and categories this year.

Housing prices in first and second-tier cities will continue to be high. But prices in third and fourth-tier cities will gradually decline due to oversupply. After the release of the regulation and control policy in 2011, many developers shifted their focus to third and fourth-tier cities where purchase restrictions were not in place. Their investments will, however, become actual supplies this year. Moreover, the urbanization construction will take away some consumers, so the situation of oversupply will worsen in the third and fourth-tier cities.

The craze for developing commercial property will cool down, while retirement property, tourism property and overseas property will become new hotspots for the real estate market.

The higher housing prices will be the main trigger for the waning interest in commercial property. The 2011 purchase restrictions on residential property had earlier contributed to the interest in commercial realty.

The unprecedented boom in commercial property during the past two years is because the purchase restriction prompted many developers to transfer their investment from residential property to commercial property, which in turn led to a rapid increase in commercial property prices. The booming market also attracted more developers, which in turn created the superficial prosperity of the market. All these will undoubtedly result in oversupply of commercial property this year.

With an aging society, the retirement property market will gradually become a hotspot. China's rapid economic growth, and the increase in urbanization and incomes will all trigger interest in tourism property.

But the greatest potential for the real estate market will still be in China's small towns, as envisaged in the urbanization strategy of the 18th CPC National Congress in November. It is also worth mentioning that, with agricultural modernization and the gradual improvement in the exchange system of rural land in the countryside, the emerging agricultural property, which is mainly in the form of modern farms, will gradually attract attention this year.

The restrictions on real estate will prompt some investors to look for investment options in overseas markets like the US and Canada. In other words, overseas property investment will be another buzzword for China's real estate market this year.

The author is professor and vice-president of the School of Management at Xiamen University. The views do not necessarily reflect those of China Daily.