One of the perplexities and perversities of modern life is that when the cost of food, fuel, clothing, phones or medicine comes down, it’s a Very Good Thing, but when home prices fall, it’s a Very Bad and Scary Thing, at least for a lot of people and many policymakers. The main reason is that it suddenly becomes clear with a massive Doh! that developers and buyers have borrowed crazy amounts of money they can never repay, and banks and the economy face ruin. In addition, China has a system (suggested in the late 1970s by a young Hong Kong patriot/property agent called CY Leung) whereby local governments rely on land sales for revenues needed to pay for public services.

The feeling of impending doom grows stronger. China is sitting on a mountain of bad debt. (How big is ‘a mountain’? No-one’s sure.) One in five urban apartments in the country is sitting empty. (Maybe. Again, nobody’s certain.) We are also told that the property sector accounts for 15 percent or 20 percent of national GDP. (Which is putting the cart before the horse, like arguing that Hong Kong ‘relies’ on Mainland tourists because there are so many of them. A worthless, destructive activity accounts for a fifth of your GDP, therefore it’s vital.)

Note the key common theme running through all this: no-one has a clue. Even basic indicators like GDP growth and inflation are falsified in China, so forget reliable data on non-performing loans or overcapacity of housing stock. Most agree, however, that there is a really huge, serious problem.

So what happens? Why of course – the stock market booms. People have been muttering about the country’s property market bursting, falling or at least subsiding for well over a year. The scarier things look, the higher the stock index goes. The government can’t/won’t allow a mega-collapse, everyone assumes, so it will bail out/stimulate as much as it takes to prop it all up, which translates into more money sloshing around, which will get invested in equities for lack of anything else, so buy now.

A few years ago, chattering Davos types started talking about a ‘Beijing Consensus’. There was a ‘Washington Consensus’ with liberal democracy and free markets, which was a discredited and exhausted joke after the financial crisis broke out in 2007. Now, China was showing the world a new way, with oh-so professional and purposeful authoritarian rule enabling and guiding smooth economic growth that avoided all the bubbles and volatility and waste and the Doh! stupidity you get with the wrecked old Western system. Oh well, nice idea. The reality: China’s policymakers can’t think of anything more original than debt-fuelled bubbles and bailouts and monetary stimulus, after all.The reality: China’s policymakers can’t think of anything more original than debt-fuelled bubbles and bailouts and monetary stimulus, after all.

This is a long way of adding to the debate about the famed David Shambaugh essay. With state secrecy and quite possibly ignorance in place of dependable public statistics, any kind of analysis can only be guesswork. Two things we can be sure of are that in China the same rules of economics apply as elsewhere, and the leaders do not seem to have any new ideas.

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Shenzhen real estate continues to outpace China’s other major cities. The average selling price in China’s 100 major cities is just RMB 10,539 per square meter, an increase of 0.24 percent over the previous month. Shenzhen’s most expensive homes continue to be located close to Hong Kong in Luohu District, where real estate averages RMB 46,236 per square meter.

If you’re looking to settle down in Shenzhen and aren’t a homeowner, you may want to reconsider your long-term plans. According to Xie Yifeng, an expert with the National Real Estate Manager Alliance, the recent cuts to interest rates by the Bank of China will continue to push housing prices upwards. Xie argued that China’s real estate market faces three main risks going forward: high inventories of unsold apartments, high borrowing costs, and the high cost of land acquisition.

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While first-tier cities like Beijing, Shanghai, Guangzhou and Shenzhen may be more resilient, some other markets are particularly prone to a downturn, according to the chief economist for Guotai Jun’an Lin Cai.

Lin counts down a list of the cities most likely to see property prices plummet. Some of the names aren’t surprising, such as the ghost city of Ordos, but the list also contains shocking examples of second-tier cities.

The list doesn’t include any cities from Guangdong, but does include four cities from Zhejiang, the most from any province.

1. Jinhua, Zhejiang
2. Wenzhou, Zhejiang
3. Yuncheng, Shanxi
4. Taizhou, Zhejiang
5. Ordos, Inner Mongolia
6. Zhangzhou, Fujian
7. Luohe, Henan
8. Hangzhou, Zhejiang
9. Datong, Shanxi
10. Longyan, Fujian
11. Handan, Hebei
12. Wuxi, Jiangsu
13. Quanzhou, Fujian
14. Anyang, Henan
15. Changzhou, Jiangsu

Photo: Anhui News

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Sixty-seven large and medium-sized cities saw prices drop from the year before, while prices rose in only three cities.

The secondary market wasn’t much better. Prices of second-hand real estate dropped in 65 out of 70 large and medium-sized cities, rose in four, and remained the same in another.

Photo: Caijing, xiangboshu

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Despite the threat of a looming real estate bubble, according to the National Statistics Department of China, real estate prices have actually fallen.

Data shows that, with the exception of Xiamen, housing prices have dropped in 69 out of 70, large and mid-sized Chinese cities. Additionally, prices for resale property have also dropped, with many Guangzhou real estate intermediaries reporting that prices and sales are down across the board.

There is however one exception in Chinese real estate that remains steadfast in the face of the downward trend, reports Xinhua. People are purchasing real estate in prime school districts for the sole reason of procuring a hukou residential permit that allows their children to attend the local school. Given that parents are not concerned about living in the area, or even renting out the apartment, these units tend to be quite small; but, since demand is driving up their value, they are extraordinarily expensive.

Wang Wa, a real estate broker, says these types of properties continue to rise in value while the value of other residential properties decline. Wang describes one such example of this trend in Beijing:

Because of the competition for places next to excellent, well-known elementary schools, the prices for these places has risen. We just closed a RMB 1.35 million deal on a place that is just 4.4 square meters large. Each square meter of this location is worth RMB 310,000.

The trend has hit Guangzhou as well. Buyers that purchased real estate to obtain a hukou residential permit accounted for 8.8 percent of all Guangzhou housing sales in September 2014, a rise of 2.3 percent from August.

Huang Tao, a real estate company manager had this to say:

Compared with last year, there has been a slight 2% rise; now, concentrated areas of second-hand properties in school districts are now worth RMB 35,000 to 40,000 per square meter.

The competition to enrol children into good schools is a Chinese phenomenon that starts in kindergarten. While a good school will no doubt provide a child with good education, the school’s reputation is central to the child’s future enrolment in good, if not better, schools in the future.

Photo: house.sina

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