Seemingly endless increases in prices were made possible only because developers had access to almost unlimited credit
NOT LONG ago prospective homebuyers in China would find large maps on the walls of property marketing offices. On display were not only the housing projects for sale. The maps also showed the parcels of government land surrounding the projects and their expected future prices, which were nearly always higher than the home units for sale per square metre. The implication for the anxious buyer-to-be was clear: buy now, or regret it forever. Very soon land prices would be far higher next door.
Whether the central government holds firmly to its red lines is unclear. If it does, the property market will be forced to make a monumental adjustment to better match supply with real household demand for homes. The annual supply of homes is now three times that of future urban-household formation, reckons Rhodium, a consultancy. Sales must fall from around 15m units per year to about 10m.
Resources are running low. Legal expertise on such cross-border situations involving China are limited and, so far, many Chinese defaulters have not been willing to cough up for high-quality advice. Accounting firms have abruptly resigned from auditing developers’ books. The early restructuring plans for a few Chinese developers have made little room for offshore creditors, says a lawyer working on a case.
The central government plans to standardise escrow accounts so that less of the developers’ cash is locked into them. But that will not be enough to rescue the sector. Investors hope that Beijing blinks and reverses some of its tough policies. Some local governments have already flinched. The city of Guangzhou cut mortgage-loan rates by 20 basis points on February 22nd. Banks in Shanghai have made similar cuts.
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