Two years after people began to hear about China's economic "soft landing," now it has finally come about. At least, the buzz word has materialized in the real estate industry, China's most important engine for domestic spending.
Industry insiders and analysts have said the rise in property prices has slowed (with only a few exceptions), and a bubble burst scenario is unlikely for 2006.
"The sector is falling within the government's targeted range for price stabilization," said Gu Yunchang, secretary-general of the China Real Estate Association.
Official data show that property prices in 70 cities slowed their rises last year in three consecutive months, from 6.4 per cent year on year in July to 6.3 per cent in August, to 5.5 per cent in September. The statistics are not updated frequently.
According to Gu, the real estate industry will remain a key engine in China's economy as it generates both consumption and investment booms. The challenge ahead, he said, is to make it healthier.
The government introduced measures last April aimed at curbing rampant growth in the sector. Measures vary from city to city and include a capital gains tax, depending on the length of a buyer's holding period, and the tightening of land transactions and pre-completion sales.
The measures have sent prices down in some cities that once led the housing boom in the past couple of years, such as Shanghai and a few towns in the neighbouring Yangtze Delta.
"Despite the downturn in average statistics (in Shanghai), we notice there are still some projects, such as the Jing'an Four Seasons (a home project in downtown Shanghai), that are getting a good market response," said Michael Hart, China research chief in Shanghai for Jones Lang LaSalle, a leading real estate management and investment firm based in Chicago.
He said the demand in the Shanghai market is still high, considering the millions of affluent residents and investors who can be potential buyers once the local market stabilizes.
Prices in Beijing are rising moderately. In Shenzhen, the country's richest city in terms of per-capita income, prices have become red-hot in the past several months, with robust buying.
Although the government's efforts to cool down the market are paying off, some say continued growth is hardly to be bridled.
"To understand the trend of the market you need to put the average statistics aside and look into the specific areas," Beijing's real estate tycoon Pan Shiyi said. "As far as the Beijing market is concerned, there is no way the prices will go down."
Official statistics show that the transaction price of future delivery housing in Beijing climbed 24.7 per cent year-on-year from January to September in 2005.
But the surge mostly took place in the first quarter, and fluctuation became narrower after April. Home prices in September increased only 1.1 per cent from August.
"The government initiated some restrictive policies at the end of March, and that had some repercussions in the market, especially the high-end property," said Pan, who built his reputation by offering ultra-modern projects in downtown Beijing.
"But we see the market stabilized in September, and I think even in the worst scenario there will be no drops in price or transaction volume in the near term."
His confidence was based on the sound economic growth nationwide and a situation that demand for housing in the capital city outgrows the land available for development.
According to a recent survey of 2,736 non-native Beijingers by the leading real estate website www.focus.cn, 80.2 per cent of them, including some expats, said they had plans to buy property in Beijing for career development or investment concerns.
As the government scrapped the traditional free housing welfare in government departments and State businesses in the late 1990s, the only way to own a home in Chinese cities is to buy in the market. Adding to the real demand is a huge number of investors currently being squeezed out of the stagnant stock market, and who can hardly find other investment options.
Every year the dozens of universities based in Beijing generate more than 150,000 graduates, with a majority of them staying in the capital city to work and live. Ministries and commissions of the central government recruit more than 10,000 civil servants from all over the country every year, and the Beijing municipal government recruits several thousand, let alone migrants from other channels.
The Beijing Municipal Land and Resources Bureau said at a press conference in August that the new land available for commercial development was about 700 hectares in the first half of 2005, compared with a demand for 4,000 hectares.
Moreover, the bureau announced that it would stop the supply of land for commercial development inside the Second Ring Road - the heart area of the 800-year-old city, fuelling sentiments for further price growth.
The consensus of many local developers and home buyers is that Beijing's property boom will never ebb until 2008, as the upcoming Olympics is bringing the city a facelift of landscapes, a new crisscross subway network and enormous business opportunities that will all propel real property values up further.
Despite the buoyant outlook that is popular in Beijing and many other cities, some add a note of caution.
"Every industry has a cycle of ups and downs, and the real estate industry is no exception," said Yi Xianrong, a senior economist with the Institute of Banking and Financing under the Chinese Academy of Social Sciences.
"Once the price goes too far from the general public's purchase power, the situation will reverse and even the wealthiest developer won't be able to escape."
For more than five years, China's real estate investment has been growing three times as fast as the growth in the gross domestic product, resulting in soaring steel and cement prices, a shortage of electricity, and fears that the economy will become overheated.
Speculations have also gone unrestrained. In Shanghai, the country's financial centre, prices of many apartments doubled or tripled from 2003 to 2004. Stories that someone mortgaged five or more flats or villas for speculation were common at that time when prices rose almost every day and buyers lined up before every new project.
"If real estate prices grow too fast, they will far exceed their real value, causing a bubble," the central bank said in an August 5 report last year.
The report said a bubble was already apparent in the second-hand and luxury housing markets last year in Shanghai, where average prices soared 19.1 per cent in the first quarter.
The Shanghai municipal government responded. The floor lending rate for housing loans of five years or more was raised 20 basis points in March to 5.51 per cent. Also two major rules were changed, one requiring homeowners to pay off their mortgages before they sell a property and the other requiring buyers to come up with a down payment of 30 per cent rather than 20 per cent.
Moreover, the government planned land parcels to develop low-priced home projects totalling 20 million square metres in 2005, a move calculated to contain the sky-high prices.
Property prices in Shanghai have been falling for several consecutive months along with the number of transactions. According to the National Development and Reform Commission, although the average property price in the 70 cities it surveys rose 0.5 per cent from September to October last year, Shanghai was one of only five cities that posted a decline. The real situation in many local projects is believed to be worse, with some failing to sell even one flat since they were put on the market.
"When the market was in a boom every body thought the price would go up and up," said Michael Hart of Jones Lang LaSalle. "It would be positive for people in China to realize the real estate market does not go in one direction only."
He said the ups and downs of the Shanghai market can serve as a reminder that not only the local investors but also investors in other cities need to be more mature.
Back to earth
Still, there are a few flashpoints in the country's real estate sector.
In Shenzhen, home prices rose an average of 12.2 per cent year-on-year to nearly 7,000 yuan (US$854) per square metre in the nine months ending on September 30 last year. But the market may have had help: local media widely suspects that at least 30 per cent of the purchases were made by speculators from neighbouring Hong Kong and other cities on the mainland.
The situation recently prompted the city government to tighten rules on transactions, such as requiring developers to sell at once, rather than in batches, all residential units available in new projects if pre-sale consent for incomplete flats is granted.
But the general picture nationwide seems to be cooling. Although home prices remain considerably higher year-on-year, monthly growth is getting close to zero.
According to the National Bureau of Statistics, property investment growth has slowed considerably from 26.7 per cent in the first quarter, as the average growth in the January-to-September period turned out to be 22.2 per cent.
"There was some blind and reckless atmosphere in the market, and after the government's tightening up, the sentiment tended to be wait-and-see," said Gu of the China Real Estate Association. "But now the atmosphere is more rational, and the market is getting warm again."
But some experts aren't ready to take down the caution flags yet.
"The government cannot afford to let the real estate sector collapse because that would dampen the overall economic growth and may even trigger a financial crisis," said Su Jing, an analyst with the Beijing-based economic think tank Anbound.
Central bank statistics show loans for real estate development and mortgages in 2005 amounted to 2.68 trillion yuan (US$327 billion) through September, 14 per cent of the country's total balance of loans.
"But neither can the government opt to ease prices by massively increasing the supply of developable land because that will ignite a new construction boom and an increase in material prices and, therefore, nullify all its efforts to avoid overheating," Su said, contending that Shanghai's developing of 20 million square metres of low-priced housing was just an "individual case."
"But now the market is so sensitive," Su said, "that the government will have to think twice before taking any further moves."