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Even China isn’t immune to real estate bubbles

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The FT is reporting that China a rising world economic superpower, whose banks largely escaped unscathed from the US financial meltdown may see its real esate prices drop like a stone:

China property prices ‘likely to halve’
By Jamil Anderlini in Beijing

Published: April 13 2009 10:39 | Last updated: April 13 2009 16:12

Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.

The property market, along with exports, were leading drivers of the booming Chinese economy over the last decade and the downturns in both have taken a heavy toll.

Cao Jianhai, professor at the Chinese Academy of Social Sciences, a leading government think tank, said an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.

He told the Financial Times he expected average urban residential property prices to fall by 40-50 per cent over the next two years from their levels at the end of 2008.

“Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation,” said Mr Cao, known as one of the “three swordsmen” of the real estate market because of his influence as an official economist.

Average urban housing prices across 70 cities in China fell 1.3 per cent from a year earlier in March but were up 0.2 per cent from February, according to figures released on Monday by the National Bureau of Statistics.

That broke seven months of sequential declines and was accompanied by a rebound in transaction volumes.

Residential property sales rose 8.7 per cent from a year earlier in the first quarter in terms of floor space sold, compared with a fall of 20.3 per cent for the whole of 2008.

Real estate agents in the residential property bellwether of Shanghai said the market seemed to have bottomed out as a result of government stimulus measures, falling prices and pent-up demand from owner-occupiers.

But Mr Cao said preliminary government investigations had turned up numerous examples of real estate developers using fake mortgages to offload apartments on to the books of state-run banks facing enormous pressure from Beijing to rapidly increase lending to boost the economy.

Sales are also being driven by real pent-up demand from urban citizens, but Mr Cao said many were jumping into a false rebound because they had never seen house prices drop before.

Before widespread privatisation of real estate began in the late1990s, most city dwellers were allotted housing by their work unit or by the state. The first private home mortgages since the 1949 communist revolution were granted barely a decade ago by state-owned banks.

At a national level, average housing prices tripled between 2003 and the peak in mid-2008 and are now 10-12 times average income, which means 60 per cent of homebuyers’ monthly income must go to mortgage repayments, Mr Cao said.

The volume of empty apartments across the country hit 91m sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures.

Those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587m sq m or apartments sold in the last five years but left empty by their owners.

Additional reporting by Patti Waldmeir and Michael Skapinker in Shanghai
Copyright The Financial Times Limited 2009

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Written by defennder

April 14, 2009 at 12:40 AM

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