China prices to fall next year, Nomura predicts

HONG KONG: Lee Wee Liat puts more than his money on the line when it comes to recommending a buy on property. As China property analyst for Japan's biggest brokerage house, Nomura, he has his reputation as a reliable researcher to consider as well as his wallet.

So when Lee says he is waiting to buy a property in China but won't make a move until prices fall next year -- perhaps by as much as 20% -- then it may be worth sitting up and paying attention.

Lee believes that the series of measures taken by the central government in China since the beginning of the year to cool down demand for property are insufficient and initially at least, home prices in mainland cities will continue to rise.

"The measures are not tough enough. And the most important factor is that since the present supply of private flats is limited, prices will still go up 15% although volume will go down a bit -- perhaps 5% to 10% this year," said Lee.

Sherman Lai, chairman of Centaline Group, said prices and sales activity picked up in many cities including Shenzhen and Beijing last week, reflecting continued eagerness from new home buyers.

Michael Wu, a director in Fitch Ratings' Asia-Pacific corporates team, said the immediate outlook for the mainland market was positive due to continued strong demand.

But looking further ahead, Nomura's Lee said with new supply now under construction and in the pipeline for release later this year, and the likelihood of further and tougher policy measures to contain prices, the market would likely undergo a sharp correction in 2011.

China Overseas Land& Investment, for example, has said it would begin building work on an additional nine million sq m of residential space, bringing the total area presently under development to about 16 million sq m. This compares with the company's new construction of just four million sq m last year.

Lee expects much of this big increase in supply will be released for pre-sale by the end of the year. And the anticipated surge in home prices this year will prompt the central government to introduce tougher measures to contain prices, he said.

"The result could be a fall in prices of up to 20% next year." And that is what Lee is waiting for before making his move. "I will buy when the market corrects next year," he said. "Once prices drop I will look for an opportunity in Shanghai."

House prices in China rose by an annualised 10.7% last month, the fastest pace in almost two years, adding to concerns that a property bubble is forming in the world's third-largest economy.

The country's political leaders and the banking regulator share these concerns and have imposed measures or pledged to introduce new tax charges aimed to rein-in runaway property prices.

The latest warning came on Monday (March 29) when an official at the Ministry of Land and Resources said that China was speeding up the process of launching a property tax in a move to increase the cost to owners of holding onto properties.

Last week, Liu Mingkang, chairman of the China Banking Regulatory Commission, said the CBRC would closely monitor China's asset bubbles. The regulator has told banks they should stop approving new lines of credit to 78 government-controlled companies whose core business isn't property development if they use collateral other than construction projects already in progress. The government has twice lifted banks' reserve requirements this year to cut back property lending, and re-imposed a tax on home sales.

But while the full effect of these measures has not yet been felt by the market, they did not go far enough, said Nomura's Lee.

On the supply front, because of the strong market last year, developers did not have much inventory this year, he said. For example properties which got pre-sales approval but not yet sold amounted to 4.7 million sq m of gross floor area in Shanghai as of last week. In December 2008 when the market slowed, the stock was as high as 8.5 million sq m, according to Nomura. – South China Morning Post