Real Estate Prices Tumble as Chinese Government Tries to Contain a Bubble

The Chinese government hiked interest rates and tightened limits on bank lending and mortgage availability in an effort to tame inflation and prevent a stimulus-induced housing bubble from bursting, and The New York Times notes that China’s real estate market has now begun to cool at a rapid pace:

One of the world’s few remaining real estate bubbles finally seems to be losing air. Real estate transactions have slowed so quickly that in the last two weeks, brokerages across China have laid off thousands of brokers and closed hundreds of offices.

News media have reported on at least five street demonstrations in Shanghai since Oct. 22 as early buyers in condo projects have protested discounts offered to later buyers, even breaking into sales offices and smashing models of the buildings and apartments.

A 32-year-old protester said that he and his wife had paid $173,000 last January for an 850-square-foot apartment in a building on the outskirts of Shanghai. But the developer later cut the price for the remaining units of this size in the building to $124,000, wrecking the resale value of the condo.

To add insult to injury, the building is not scheduled to be completed until May.

AFP is reporting that cash-strapped developers are offering a series of enticements, including luxury cars, to lure potential apartment buyers. Today, The Diplomat’s Mu Chunshan placed China’s housing bubble in the context of broader economic uncertainty and the European debt crisis:

Europe is the largest single market for Chinese exports, and the crisis in Greece and Italy will naturally put pressure on China’s economy. Indeed, figures released today already show China’s exports rising at their slowest pace in two years. To protect growth and prevent a hard landing, China may consider easing monetary policy, a move that would risk exacerbating the property bubble that the government has busily been trying to deflate.

Such concerns aren’t unfounded. I remember during the global financial crisis of 2008 receiving half a dozen marketing text messages a day. I sometimes even received cold calls from sales agents. At the time, China’s property market was still depressed, with properties within a six to seven kilometer radius of the Forbidden City being priced at as little as 10,000 yuan ($1,580) per square meter.

And now, my phone is once again ringing with sellers highlighting the falls in property prices. Is the Chinese real estate bubble bursting? Could falling property prices and a possible slowing of European demand prompt the Chinese government to ease monetary policy once more? And would this spark another property boom just as prices look to be falling in some areas?

Similarly, the Wall Street Journal questions how the Chinese government will walk the tightrope if property prices fall too far and fast:

An unanswered question is whether China can gently let the air out of its real-estate bubble or whether the bubble will burst, undermining economic growth. With the European Union and U.S. struggling to kick-start their own economies, global growth depends increasingly on the health of the Chinese economy, the world’s second-largest.

Beijing’s top officials say they plan to stay the course. “I will especially stress that there won’t be the slightest wavering in China’s property-tightening measures—our target is for prices to return to reasonable levels,” Premier Wen Jiabao said in a speech on Sunday in Russia.

See also previous CDT coverage of China’s attempts to curb debt and regulate inflation, and growing signs of a credit crisis in Wenzhou, where property developers and entrepreneurs have turned to the shadow lending market after monetary tightening hindered their access to traditional funding sources.