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By Stephen M. Harner
June 20, 2004

Cs动产s场- A Visit to the "2004 C["

It is one of the hottest topics of conversation in Shanghai:  Has the property market is动产s场jpeaked? 


The writer has been studying this question recently, and thus was pleased to take the opportunity to visit the 2004 Shanghai Property Trade Fair g2004 C[h which was held in the CW览S on H on June 17-21.


No Doubt that Shanghai Real Estate is a Bubble


Even before visiting the Trade Fair, the writer had no doubt that Shanghaifs property market had become a gbubbleh that will soon burst.  And the visit did nothing to change my mind. 


The fact is that Shanghaifs property market has become massively over-developed and is becoming increasingly over-supplied with both residential and commercial properties.


At the g2004 C[h property developers (sellers) were clearly worried.  Very few were willing to put a price on new developments that will be offered for sale in the next few months.  What is now apparent is that, after five years of good times, Shanghai is enter a multi-year gbuyerfs marketh (买s场).


gMiddle-Upper and Upper Scaleh (㍂Z) Residential Flats Will Crash


In the residential sector, the amount of over-supply in the gmiddle-upper and upper scaleh segment is especially severe.  More ominously, a very large part of gdemandh in this segment over the last two years has come from small and large property speculators, not real owners.  As a result, when prices begin to fall—as they are beginning to do—we can expect to see panic selling and a long decline in prices.  My guess is that prices of gmiddle-upper and upper scaleh flats in all locations except the most desirable (along the Huangpu River in Lujiazui and in Jingan and Luwan and close-in Xujiahui Districts) will drop 30-50% over the next 2-3 years. 


务Os场Commercial  Market also Overbuilt


Because of massive over development and over-supply, and intervention by the government over several years to boost demand (and help developers), in 2004 the Shanghai property market entered the classic end-stage of a real estate bubble: 


Over-building and Lack of Planning (过}C规划s)


Over-building in Shanghai has become obvious in recent years.  Of course, Shanghai has needed new development, so new building was necessary.  gOver-buildingh has occurred because local government officials have either not properly planned or have ignored or violated sensible development plans.  The result is too high density of high rise apartment buildings and lack of attention to and investment in environmental and social infrastructure:  green spaces, parks, roads, sidewalks


This report from [n产时报 of  2003N0929 tells the story of over-development and violations of regulations.




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Reasons for the Bubble


Between 1999 and 2004 prices for resident flats in Shanghai increased by some 20-30% a year, while supply exploded. 


There are four reasons why a bubble developed in Shanghai residential market. 


1.  Government policies


From 1999 to 2003 Shanghaifs government allowed individual buyers of residential properties to apply 100% of the cost of buying residential property to goff-seth their individual income tax liabilities.  This was a tremendous incentive for white-collar salary men and others to purchase flats.  It helped to create a steady rise in property prices beginning in 1999 (which is why the policy should have been stopped sooner).  The effect of the policy was to encourage buying property not just for personal living, but for speculation.  Most middle and upper income families bought not just one flat, but two, three or four flats. 


The main effect of the policy was to create a huge (but gartificialh) demand for the products being produced by real estate developers.  From a fiscal policy standpoint, it was essentially a transfer of city government tax revenues to property developers.


2.  Bank lending


Shanghai banks began lending for property purchases in the late 1990s.  They soon became excessively aggressive in pushing these loans.  At end 1Q 2004, individual mortgage loans outstanding in Shanghai banks reached RMB 229 billion, up 48% YoY.  At 3Q 2001 the amount was RMB 80 billion.  New individual mortgage lending in 1Q 2004 was RMB 30 billion.


3.  Local government relationships with developers


Local government officials have been willing supporters of developersf new projects.  Almost no constraints have been put on developers with the right gconnections.h


Since 1999 real estate development has contributed a significant (and increasing) part of Shanghaifs GDP growth.  Local officials are particularly keen to gmanage the numbersh and to keep development growing.


4.  Media behavior


A fourth reason for the bubble was the ghypeh provided for real estate investment and speculation by Chinese media, especially newspapers and magazines.  For more than four years newspapers and magazines have celebrated new real estate development and carried stories of ever rising prices.  This gcheer leaderh effect was consistent with government policy (influenced by developers) that has always sought to encourage buying.


Also, virtually all media reporting about real estate, and especially about particular projects, in magazines like COsChas been gpayolah: i.e., writers have been paid by developers to say positive things about their developments.  Every development is described as a ggreat investment.h


The Crash has Started in the Secondary Market


It is typical in the final stages of a gbubbleh that the rise in prices begins to slow, while transaction volume begins a precipitous decline because there are few if any buyers left.    A few recent news stories show that this is what is happening, beginning in the secondary market.


        http://www.jfdaily.com 2004-6-16 9:43:59          eFV闻晚报s[产t   @@






From ”N报2004N617 (chart below by S.M. Harner and Company)

Volume of transfers (sales) of second hand flats in May dropped 20% from April.  The largest drop was in mid-priced flats selling for RMB 500,000 to 1,000,000.

In May the volume of second hand flats sold was about 11,300 units, a significant drop from Aprilfs 14,897 units.  Compared with volume of 25,438 in March, the decline is over 50%.


Supply will Keep Coming through 2004 and 2005


From ”N报2004N614:


         During the month of May, 41 gexpected ehote propertiesh i预热盘j hit the market, double the number in April.  

         39 of the properties are gPhase Oneh developments, which will be followed by more supply this year and next.

         In the first 5 months of 2004, 106 ghoth properties have come on the market, an increase in total supply of 77% compared with 2003.

         A feature of the new supply is that ghigh endh flats (over RMB 10,000/ sq. meter) occupies a high 37%.

         The projects are concentrated in Pudong and Minhang districts, which together had a 27% share.


A Threat to the Entire Chinese Economy?


Many cities in China have real estate bubbles similar to the one in Shanghai.  Most or all of them will experience a major correction that will cause a decline in GDP growth and increase in unemployment. 


Of course, real estate development has been directly tied to and dependent upon bank lending. 


At end 2003 total China-wide property development loans and individual mortgage loans totaled RMB 2,466 billion and RMB 1,178 billion, respectively.  Up 37% and 43% respectively from 2002. 

         The property loans accounted for 21.4% of all loans from financial institutions; compared with 17% in Japan during the bubble period.

         Year 2003 characterized by speculative, illegal ginsiderh acquisition and transfer of land.

         Purchase of residential property for ginvestmenth by about 25% of buyers in Nanjing and Hangzhou


Source:  Southern Securities in Xin Caijing 2004.6


Will the coming crash in the real estate sector create a major shock to the Chinese financial system.  I think the answer is a definite Yes.   Property development in most countries creates traps and moral hazard that tend to lead to periodic systematic crises.  Those countries with relatively sound financial, political, and legal systems, and a free press, usually succeed in avoiding or mitigating the most severe types of crises.  China, lacking these elements, will have a harder time.  


back number@>> 01@2004.05.15 @ Shanghaifs New gOpenh Government: www.shanghai.gov.cn