Chinese Academy of Social Sciences Warns Against Financial and Credit Default Risk in Real Estate Market
Xu Wei
/SOURCE : Yicai
Chinese Academy of Social Sciences Warns Against Financial and Credit Default Risk in Real Estate Market

(Yicai Global) Dec. 6 -- China's real estate market will undergo some major corrections next year, and the steady decline in property price growth will continue, with property sales growth and inventory expected to drop further, forecasts the annual Housing Report (2017- 2018) released by the Chinese Academy of Social Sciences (CASS) yesterday.

As property markets in first- and second-tier cities are "frozen" under tightening government regulation, a large number of developers and investors went to third- and fourth-tier cities this year, resulting in a shift of focus on the speculative investment market, the report highlighted. Financial leveraging has been on the rise for both corporate and individual buyers, meaning that the real estate industry will face considerable uncertainty in future. Therefore, the government must push ahead with the market regulation efforts to ward off a "retaliatory price rebound," and pay due attention to financial risks and heavy leverage among property developers, it suggested.

Housing prices have stabilized in most cities following the introduction of purchase restriction measures and long-term regulation mechanisms, the report mentioned.

Increases in the average property price have remained below 4 percent this year. Stringent government regulation saw the national real estate market grow steadily so far, this year, with the gap between first-tier and second-tier cities narrowed against increasing polarization between third-tier and four-tier cities, said Ni Pengfei, head of the cities and competitiveness research center of CASS.

Housing Price Trends in Different Cities

Housing price rise has slowed in first- and second-tier cities, in stark contrast to steep price increase in third- and fourth-tier cities. New residential property prices soared by 7.4 percent in third-tier cities in September, and the growth rate is significantly higher than that in first-tier (0.5 percent) and second-tier (5.6 percent) cities, per data released by the National Bureau of Statistics for 70 major Chinese cities.

The overall risk level in the real estate sector has decreased despite accelerating property price growth in third- and fourth-tier cities. However, certain risks still exist in first-tier cities, and they must be monitored closely. If the price/income ratio reaches a high level, it is a sign of price bubble, Ni warned.

The ratio has remained at a high level in first-tier cities. The average price/income ratio in China is as low as 7.5, but that in first-tier cities has increased to 31.3, data show. The ratio in Beijing has reached 41, the highest of all cities.

Risks Involved

Urbanization has not ended in China, so the public expectations about the housing market have not changed, he added. So, a reversal or change in market regulation policies may give rise to a retaliatory price rebound, and this merits particular attention.

Funding has tightened for real estate developers over the recent years, but financial leveraging has reached an unprecedented level, suggesting a buildup of financial and credit default risk, Ni continued.

Developers' debt ratios are near or already passed the alert level. Liabilities of the 136 A-share listed property developers totaled CNY6.04 trillion at the end of September, up 23.21 percent on the year, data reveal. In particular, debt ratios at 36 companies exceeded the 80 percent alarm mark, accounting for 26.5 percent of the total, the report stated.

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Keywords: REAL ESTATE , Chinese Academy of Social Sciences , PROPERTY MARKET , HOUSING PRICES