Recently we showed that in order to goose its fading all-important housing market (to China housing is like the stock market to the US: both mission-critical bubbles designed to give a sense of comfort and boost the "wealth effect"), China has first resorted to zero money down mortgages [8]across various markets, and secondly to such gimmicks as "buy one floor, get one free [9]." However, that's only part of the story. Even worse is what is not being disclosed to the general public: such as the true state of the housing market in China. Because according to a recent report on Sina [10], quoted on Investing In Chinese Stocks, when it comes to revealing just how bad things are domestically, Chinese developers are simply pulling a page out of biotech ETF playbooks [11], and simply not reporting price drops greater than 15%!
From Investing In Chinese Stocks [12] (ICS):
Taking a page from the climate scientists who hid the cooling trend in global temperatures, Hangzhou government will hide the cooling trend in the real estate market. Any price decline more than 15% below the list price will not be entered into the online registry. Developers are not forbidden from cutting prices and no sales will be stopped, though at least one developer expressed concern that advance sales permits may not be issued if the price cuts are deemed too large.
In other words, clear the market supply imbalance, but don't see at market clearing prices, got that? Good luck.
ICS goes on to show an example on the ground of just how profound the chaos is on the ground in China now that homes are suddenly in an air pocket with no (immediate) bailout coming from the government: according to at least one real estate agent, price cuts alone would be enough to kill his firm, and that is assuming sale pick up in the first place.
Hangzhou held a 4-day real estate exhibition recently. Attendance was 230,000, but only 32 homes were sold. These numbers are an improvement from 2013 and 2012 though. One state-owned developer said that price cuts cannot cure the market. The government must step in and ease buying restrictions, ease borrowing limitations, reduce bank reserve requirements, allow people to borrow for second and third homes, etc., in order to instill confidence in the market. The developer also said the media and experts were giving one sided reports, causing more chaos in the market, while buyers are more strongly adopting the wait and see attitude. He said buyers have no bottom line, if you cut 10%, they want 15%, if you cut 15% they want 20%. His firm has used price cuts of 10% and he hasn't sold a home in 3 months. He said with government support, they can survive, but small private firms are not so confident.
A real estate agent said that even if sales pick up, price cuts will kill the firm. He said the government is more nervous than the industry because if land sales stop, they might not even be able to pay the wages of government workers. He expects, and hopes, the government will do something to rescue the market.
Dr. Ye Hongwei, Assistant Director of the Real Estate Investment Research Center, Zhejiang University, said the national government would not ease policy. He said there are really only two areas that might ease: buying restrictions and credit limits. The credit limits are set at the central government level and are unlikely to ease. The buying restrictions are set locally, but so far only small cities have enacted these policies. Wenzhou has seen prices fall for 30 straight months and there has been no real easing (aside from a small change last August). He said easing in Hangzhou is unlikely: it is a sensitive real estate market and a bellwether for the national real estate market.
Finally, another developer bluntly told reporters: the Chinese real estate market is not a fully free market, if the government wants to intervene they can. Also, these officials have a bright future, they don't need this risk, so a big policy easing is unlikely.
Well, if it doesn't work out for China's real estate industry (which according to SocGen indirectly impacts up to 80% of China's GDP) [13], all those millions of people whose livelihood depends on flipping a bubble from one group of great fool to a group of greater fools, they can just open E-Trade accounts and do the same in the US only with stocks. There the number of transactions is also declining but at least prices are rising to fresh record highs day after day.