Chinese still wary of homes market

Like scores of towns and cities in China, Baoding has seen a rapid increase in new home prices. But will this boom turn into a bust?

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After a buying frenzy and building boom over the past few years, residential property prices fell last month in 45 of China's 70 major cities and increased in only four. Prices remain high, but enthusiasm of buyers has quickly cooled. Daniel Bardsley, Foreign Correspondent, reports

The model of the Guo Zhai Hua Yuan development in Baoding city shows the sort of attractive features one would expect from a project named "dream home".

There are landscaped gardens, architectural flourishes from the Tang and Song dynasties and, true to form for modern China, some copying in the form of a community centre modelled on one of the 2010 Shanghai Expo buildings.

"The whole project is themed around harmony," said Wang Wenxia, 26, an assistant at the developer Huazhong Realestate, with practised fluency.

"It is harmony with nature and people living in harmony with their neighbours. And we have the most comprehensive facilities."

Impressive though it sounds, with 1,800 luxury apartments in a prime downtown location, Guo Zhai Hua Yuan is just one of countless schemes emerging in this city of 1.6 million.

An hour south-west of Beijing, the former capital of Hebei province is at the frontline of China's building boom, with a cityscape full of cranes and half-finished apartment blocks.

Baoding has reported rapid increases in new-home prices, from about 3,000 yuan (Dh1,750) per square metre in 2007 to 6,000 yuan in 2010.

At its peak, residents were "crazy about buying property", said Ma Tengfei, 28, Huazhong Realestate's sales manager.

"We gave our customers only half an hour to decide whether to buy or not because we had other customers interested. People were in such a frenzy, they didn't worry about the quality. They were just worried whether they could get one," he said.

Later that year, the market cooled locally and nationally, thanks to measures such as restrictions on second-home purchases and increases in minimum down payments. Those without a Baoding residence permit were stopped from getting mortgages in the city.

While there has not been a crash, government data indicates new home prices fell in 45 of China's 70 major cities last month, and increased in just four.

The authorities are keen to avoid large falls, which would be disastrous for the economy because property directly accounts for 12 per cent of GDP, according to the IMF, and more if related industries such as steel and cement are considered.

Equally they do not want further price rises and the creation of a bubble that could burst. Qi Ji, the vice minister of housing and urban-rural development, recently said the government "must persist in our property policies" while prices remain high, and analysts at EC Harris predicted cooling measures would remain at least for the rest of this year.

Across China, potential buyers are now holding off.

Mr Ma said at the peak his offices received 20 to 30 visits a day from families or other potential purchasers. Now the figure is five or six.

With the market in limbo, those who snapped up property several years ago are glad they did so. Others face significant challenges.

Pei Wenbo, 31, an accountant, bought his three-bedroom flat in the north-east of the city in 2008, paying about 3,000 yuan for each of its 167 square metres. He has since bought a second, yet-to-be-completed flat as an investment.

"It's a huge relief that I got this apartment earlier," he said. "Nowadays there's a huge pressure on people thinking of buying a flat.

"Wage earners find it almost impossible to afford an apartment, because incomes haven't kept up with property price hikes."

For Huang Kangning, 23, a power generation engineering student at a technical college in the city, buying a property without help from his parents "wouldn't be possible" on the salary he is likely to earn. He would like prices to fall, but is pessimistic.

"I think the best thing is that they will stop going up," he said.

Nationwide, the perception remains that property is expensive, with more than two-thirds of respondents to a central bank survey indicating prices were too high.

Just one in seven respondents were looking to buy a property soon, the lowest figure for 13 years. Analysts believe the market will only pick up once prices fall further.

As apartment blocks continue to go up by the dozens in Baoding, Mr Ma admits citywide there is an overhang of thousands of unsold properties from last year.

At the 2008-2009 peak, the city could absorb 10 million square metres of residential property annually. Now he estimates apartments are being built 20 per cent faster than they are being bought. Projects under construction are likely to be advertised at slightly lower prices than would have been the case previously, he said.

"Every real estate developer has prolonged its sales strategy from one year to two or three years," he said.

Despite this, many of China's top property developers predict solid demand in most parts of the country and are stepping up building programmes. China Vanke,the largest, forecasts it will complete 35 per cent more homes this year than last year. Some others are looking at similar increases, although big developers may not be representative as they are better able to deal with the liquidity problems stemming from market's seizing up.

There are modest reasons for optimism in Baoding. Two years on from the introduction of tightening policies, people are starting to believe that if there are no more cooling measures, prices will hold up, said Mr Ma.

"So they are starting of think of buying out of need [rather than investment]," he adds.

Most home owners agree. Sun Tiejing, 31, who works in accounts for a telecommunications company and bought an apartment in Baoding with her husband in 2009, doesn't "imagine prices will drop at all" given the growth in urbanisation.

"Demand is still quite solid," she said. "These colleges are attracting huge numbers of students from rural areas. When they graduate they don't want to go back. They want to stay in the city and live."