China property prices to rise 10% by end ‘10

Source : Reuters – 22 Jun 2009

A rebound in China’s residential property market is set to continue but economic uncertainty means sentiment will be cautious and prices nationwide will rise a modest 10 percent between now and the end of 2010, a Reuters poll shows.

Property prices in bigger cities, where wealth levels and spending propensity are higher, will outperform second-tier cities with apartment prices in Shanghai, Shenzhen and Guangzhou set to rise by at least 10 percent in the next 18 months.

The poll coincides with a Reuters global real estate summit.

Home sales in first and second-tier cities have jumped more than 20 percent in the past three months, analysts say, after correcting in the second half of last year.

The market has been boosted by interest rate cuts and government measures such as stamp duty cuts and reduced mortgage down payment requirements, which are part of a broader economic stimulus plan.

“Policy is aimed at persuading people that property prices are not going to fall,” said Paul Cavey, China economist at Macquarie Securities in Hong Kong. “The government is using property market reflation to boost economic growth. So it looks more likely that property prices will rise.”

Prices for some new developments in Shenzhen and other big cities are up 20-30 percent after being discounted by as much in the second half of last year after a property bubble burst.

However, average property prices in Chinese cities in May were up 0.6 percent from April, but down 0.6 percent from a year earlier, according to the National Development and Reform Commission.

CREDIT SURGE

The market is benefiting from excess liquidity in China but analysts say a repeat of the property bubble in 2007 — which saw some Shanghai apartment prices soar 40-60 percent through 2007 and early 2008 — is unlikely. At that time, the economy was growing by 13 percent annually and incomes followed suit.

This year, the economy will be hard pressed to meet the government’s 8 percent growth target — the World Bank forecasts 7.2 percent growth — and that will make buyers cautious.

A faster-than-expected economic recovery could prompt the government to tighten monetary policy and repeal tax cuts and other incentives, while a slower economy would depress market confidence, analysts say.

“Our immediate concern is that, if prices go up too sharply before the economy recovers we could see a policy reversal and that could slow things down,” said Nicole Wong, property analyst at CLSA. “The government wants steady (property) price gains. It doesn’t want speculation.”

The property market has benefited from a surge in credit this year, as the government encouraged banks to lend and spur economic activity.

However, Banco Bilbao Vizcaya Argentaria (BBVA) says prices nationwide are overvalued by 5-10 percent. It forecasts nationwide property prices could dip by up to 5 percent between now and the end of 2010.

Yields in some sectors are not that attractive: in Shanghai, for example, gross yields on mid-market flats are only 3-4 percent, analysts say.

Still, Shanghai and southern cities Shenzhen and Guangzhou are likely to outperform because prices have fallen more than in smaller cities and supply is not so strong. Land sales in Guangzhou and Shenzhen have been limited in the past few years and auctions in the past few months have drawn record bids as the market upturn has prompted developers to snap up plots.

Prices in second-tier cities will gain about 5 percent over the next 18 months, compared with double-digit gains in first-tier cities although Beijing is likely to lag due to a supply overhang in the capital, analysts say.

In Wuhan, Tianjin and Shenyang, ample supply will keep a lid on prices. However, analysts say prices in Chengdu in western Sichuan province and nearby Chongqing have lagged and should see double-digit gains by the end of 2010 as they catch up.