China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets, a person with knowledge of the matter said.
Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.
Then there’s this report from China Daily providing some detail on an apparent crackdown on, and repossession of, unused land. Well, ‘unused land’ – we hope that’s not a euphemism for land hoarding.
So does the CBRC know something we don’t, and is this the long-awaited Chinese property crash? Not according to the billionaire developer Zhang Xin, Bloomberg reports.
At the same time, Standard Chartered’s Stephen Green has looked at recent policy shifts with another on-the-ground view of the market, and is pretty positive.
Having interviewed local government officials before, this time Green’s spoken to the real estate developers based in Tier 2 and 3 cities — that is, beyond Beijing, Shanghai and Shenzhen, among other Tier 1 cities.
As Green notes on the property-price fall issue (emphasis ours):
…while the focus is on Tier 1 cities, there is a good chance that they do not represent the national trend. There are, after all, hundreds of other cities around China that are busy growing, and in which people might be still busy building and selling apartments. Sales have fallen in Tier 2 and Tier 3 cities too, but not by as much as in Tier 1 cities, as Chart 2 shows [above]. (In our chart, we have used data from 10 cities: Tianjin, Chongqing, Chengdu, Hefei, Wuhan, Changsha, Dalian, Nanjing, Suzhou and Changchun). Indeed, in some cities – Hangzhou in Zhejiang province, for instance – we have actually seen prices push up a little since April.
While on the supply and pricing of land:
Price declines have been concentrated in Tier 1 cities. Chart 8 shows the massive declines in land prices in Shanghai, Beijing and Hangzhou since the beginning of the year. But Chart 9 shows the absence of a big rise and lack of a big fall in land prices in most of China’s other cities. Apologies for the mess of lines in this chart but we hope the fact that all of the Tier 2 and Tier 3 cities’ land prices shown are cramped at the bottom of the chart is a positive sign. This was a Tier 1 bubble and it looks to have been pricked without killing the Tier 2 and Tier 3 markets. [See charts below, click to enlarge:]
And since local governments control land supply as a means of revenue, we found this question posed to developers rather crucial:
Do you foresee more land plots being released for auction in your city this year than last year?
Taking the Ministry of Land and Resources’ (MoLR) plan for land sales in 2010 at face value, much more land will be put on the market this year than in 2009, and faced with this onslaught of supply, land prices will fall. (The MoLR has announced a plan to release 180,000 hectares of new land supply in 2010, compared with 76,000 hectares in 2009.) But while Beijing can set targets, it does not control land auctions at the local level. So we asked developers if they really think that there will be more plots released this year than last in their cities. Half of them said no. Only 12 said there would be. Local governments are interested in sustaining land values, so they will control supply.
Well — we’re not sure how much political clout local governments would have if it really came to a crunch with Beijing. Then again, the rule of law remains weak in Chinese property overall — 24 out of 30 developers surveyed said they knew of companies that had illegally taken out bank loans to buy land.
That’s far more than one toughened-up stress test can fix. At least Green’s found grounds for optimism overall, however:
The Tier 2 and Tier 3 cities have not seen much of a correction in land or apartment prices. Moreover, developers’ sentiment about sales volumes seems pretty good, and they do not appear to be postponing construction. A wave of new supply is planned for September. Developers on the whole seem to think sales volumes will be down 20-30% y/y this year, which is eminently survivable…
This is important, since if sales and construction activity holds up in most Tier 2 and Tier 3 cities, then the economy will not tank, and the State Council will not be forced to loosen real-estate or monetary policy.
‘Eminently survivable’. Let’s hope those words don’t come back to haunt us.