Tuesday, December 27, 2011

An update on China's property market correction

Here is an update on the post describing the property markets price correction in China and the authorities' reaction to the impending downturn.
Dear Professor Chovanec:

We are trying to reconcile the numbers in your fascinating article on China property markets:
"According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone"
With this Bloomberg report:
"New home prices in China's four major cities of Shanghai, Beijing, Shenzhen and Guangzhou each retreated 0.3 percent from October, the biggest monthly falls for these metropolitan areas this year, according to data from the statistics bureau."
That's a factor of over 100 and can have enormous implications globally.  Can you please elaborate.

Much appreciated
Sober Look

From Professor Chovanec (professor at Tsinghua University's School of Economics and Management in Beijing, China):

"Correct, there is a very large discrepancy between the official price statistics and what is being reported by the property agencies. I'm not sure why this is so, since I don't know what methodologies they each are using. I suspect its due both to the coverage of the survey and how prices are recorded -- ie, asking prices vs. transaction prices. There is currently a BIG gap between asking prices and what homes are actually being sold for, and that doesn't even include hidden forms of discounts like buy-back guarantees, free gifts, etc.

 The original report on the Homelink data can be found here:
 http://estate.caijing.com.cn/2011-12-01/111467052.html "

A reader comment (update):

"The bigger reason for the discrepancy which I think Professor Chovanec didn't realize, is that when a block of new apartment building is offered for sale, an average price is set and that price is difficult to change (or else the people who bought at higher prices may demand compensation) until the block is all sold (which lasts from a few months to more than a year). In the Caijing article the 35% price drop was specifically calculated from the newly offered blocks, for which the developer could set prices to whatever they see fit. The Bloomberg number ... was from all units.

Therefore the 35% price drop is real. But the units sold at 35% discount may not be representative to all unsold new apartments. Beijing has 1-2 hundred thousands unsold units. I am sure of the 10 thousand RE developers in China some are getting desperate. Note that in the same Caijing page Professor Chovanec quoted, prices of second hand homes in Beijing were down 3% (that is transaction prices) compared with October. Also indicating that prices falling off the cliff hasn't happened (yet)"
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