More Housing Discounts on Way as China’s Developers Feel Pressure

After two quarters of slowing homes sales and the occasional developer collapse, China real estate analysts are predicting lower prices and looser credit for the second half of the year.

A report released this week by CRIC, a unit of E-House China, projects that the country’s developers will be forced to cut prices in approximately 27 percent of the more than 4,000 housing projects that it currently tracks.

E-House competitor, WorldUnion sees a similar situation, predicting that the increase in China’s unsold inventory of new homes during the first half of the year could lead to price reductions of 15 percent or more during the second half of this year.

Discounts Driven by Falling Demand

The willingness of developers to cut prices is a result of sharply falling demand for housing in China this year, as well as an acknowledgement of a shift in buyer attitudes from a “rush to buy before prices rise” approach, to a “wait and see if prices fall further” outlook.

According to data released on Monday by China Real Estate Index System (CREIS), a division of property website Soufun, pricing for new homes declined an average of 0.5 percent nationwide during June compared to the previous month. Of the 100 cities polled by Soufun, 71 of the communities reported falling prices.

WorldUnion’s head of research in Shenzhen, Liu Wenchun, was quoted in the South China Morning Post as saying, “For the market to recover, developers would have to cut prices and credit policy would need to be relaxed.”

Liu noted that there are already signs of banks speeding up mortgage approvals and predicted that developers could cut prices by more than 15 per cent in the second half, compared to price reductions of less than 10 percent that the agency observed in the first half of the year.

Many real estate companies are already taking more extreme measures, with the owners of at least two projects in Zhejiang guaranteeing homebuyers that they will repurchase homes at a markup if prices fail to rise.

Discouraged Developers Buying Less Land

Developers’ inability to clear unsold inventory has apparently also killed their appetite for new land, after the industry had gorged itself on new sites in 2013.

A report this week in the Wall Street Journal found that second quarter land sales in China were down by nearly one-third in the second quarter compared to the same period in 2013. By area, the amount of land sold in 300 Chinese cities fell by 29 percent to 247.7 million square metres during the period from April to June of this year. The figures also represented a 14 percent quarter on quarter drop from the first three months of the year.

At least for the month of May, however, the biggest problem with 2014’s land sales may be that 2013’s sales were unusually high, as developers enjoyed a surge in housing prices and sales volumes.

While May’s land sales were down 45 percent compared to the previous year, in terms of transactions, that in part reflects a record year in 2013.

Land sales in China’s major cities hit record highs in 2013, with the total transaction values for the country’s four top-tier cities exceeding RMB 500 billion ($82 billion) – about 150 percent higher than what was recorded in 2012, according to figures from Centaline property agency.