The residential property market in China is yet another sector that has been deeply affected by the global financial crisis. The government is stepping in to boost activity as developers around the country counter falling demand. Despite a cloudy outlook, home sales are expected to recover in the long term, as affordability improves and urbanization across the country continues.

It is certainly a turbulent time for China’s residential property market. Since June and July of this year, transaction volume on home sales has fallen substantially, dropping by 40 percent compared to the same period last year. After a decade of double-digit increases in housing prices, hesitant buyers are now waiting for the market to bottom out.

With market transactions at a new low, property developers are creatively offering all types of incentives to lure buyers, from free flat panel televisions to even brand new BMW automobiles. In Jiangsu Province, one developer posted an advertisement offering to rebate three grams of gold for every square meter purchased. According to local media reports, the response was lukewarm. China’s once sizzling residential property market has taken a downward turn and the outlook is grim.

The residential property market in China is still relatively new. The privatization of urban housing in China only began about 15 years ago, but due to rapid urbanization, the process quickly took off. According to a recent property report by Morgan Stanley, the home-ownership ratio in China is well over 80 percent, one of the highest in the world.

Homebuilding contributes to a significant share of the economy, accounting for 10 percent of China’s gross domestic product, versus just 4.6 percent in the U.S. The recent downturn in the property market could have far-reaching effects affecting many related industries.

Present situation

Intuitively, an abundance of supply and little demand for housing should lead to lower property prices. Vanke, the country’s largest residential real estate developer, was the first company to slash prices on certain projects, in addition to being the first developer to publicly admit doing so. However, there is no consensus among industry analysts as to whether other developers will follow suit, and to what extent.

For larger developers with strong branding and name recognition, transactions appear to be coming through when the prices are lowered. For lesser-known developers however, even with discounted prices, homes sales have been slowing to a crawl in recent months.

Richard van den Berg, managing director and country head of ING Real Estate Investment Management in China has observed the trend. “What I can see is that a lot of developers are trying to slash prices,” he says. “But in cities like Wuhan or Chengdu, our neighboring projects have huge problems just getting any kind of sales velocity. But these are of second- or third-tier developers, without much branding.”

In order to gain some sort of traction, smaller developers are cutting prices anywhere from 20 to 30 percent, van den Berg says.

Michael Klibaner, national director and head of research at Jones Lang LaSalle in Shanghai, agrees that smaller developers with less brand recognition, even if they were to slash their prices, may not see any increase in home sales. And thus, as counterintuitive as it may seem, prices have not necessarily fallen despite reduced demand. The number of reported transactions is simply too small to be reflective of the entire market.

“There is a lot of anecdotal evidence about falling prices,” says Klibaner. “But if you look at the macro data, there is no evidence of prices going down.”

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