Housing boom in small cities to cool down after cuts in subsidies for shantytown redevelopment: analyst
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Surging home prices in small Chinese cities will probably experience a downturn as the country begins to cut down cash compensations for local residents whose homes are demolished in what’s called “shantytown redevelopment”, said market observers.

Home prices in many lower-tier cities in China have been retreating from previous highs lately, reported the 21st Century Business Herald, a Guangzhou-based newspaper, citing market data.

“Home prices in the city are really high, but I need to buy an apartment because I’m about to get married”, said Liu Hong (alias), 25, in Liaocheng city, East China’s Shandong province.

Liu purchased a new house in the small city for 9,350 yuan per square meter this October. After the down payment of 310,000 yuan, he still needs to pay 4,900 yuan for the mortgage every month.

Two years ago, home prices in the city situated in western Shandong province averaged at merely 5,000 yuan per square meter. Now, for commercial apartments by big developers and in good locations, the price has gone up to 13,000 yuan per square meter.

However, with China acting to reduce funding for its shantytown redevelopment scheme, the booming real estate markets in lower-tier cities are predicted to cool down.

Industry insiders believe home prices in small Chinese cities cannot continue to go up with subsidies taken back. “With the (policy) change affecting both demand and the markets’ upward momentum, there is a big chance that real estate markets in the lower-tier cities would begin to go down,” said Yan Yuejin, research director at E-House China R&D Institute, a real estate services company.

Liu Hong told the 21st Century Business Herald that home prices in Liaocheng began to climb from the end of 2016 when new homes were priced at around 4,400 yuan per square meter.

It’s known that in 2017, the per capita disposable income of urban citizens in Liaocheng was 25,231 yuan, with monthly salary averaging between 3,000-4,000 yuan. “In cities like Liaocheng, new homes priced at 5,000 yuan per square meter are barely affordable for local people, while in reality, many such small cities now boast of new homes beyond 10,000 yuan per square meter, which is far away from a reasonable housing price-to-income ratio,” said Yan Yuejin.

Actually, Liaocheng embarked on shantytown redevelopment project in 2016, under which the local government spared no efforts to finance the urban renovation project, giving out large amounts of cash compensations to residents in demolished areas.

At the time, the arrangements were believed to have satisfied residents’ housing needs, helped destock the glut of unsold homes while boosting local economic growth.

Meanwhile, the subsidies for reviving small cities have caused a surge in the local property markets, although the government has been taking steps to curb bubbles in the sector. It’s reported by Reuters that China had ploughed in 1.19 trillion yuan into the massive shantytown redevelopment project in the first eight months of the year, citing data from the country’s housing ministry.

Yan Yuejin said the surging prices would further attract speculators and home buyers into the markets that used to be obscure. “More home buyers tend to buy when the prices are going up.”

Liaocheng is an epitome of all small cities that witnessed a surge in home prices over the past two years.

E-House China R&D Institute released a report monitoring 100 Chinese cities at the end of November, noting the unit price over 10,000 yuan for many lower-tier cities had been maintained for 15 months.

China’s national bureau of statistics released a report for October’s commercial residential apartments in 70 cities, finding that among the top 10 cities with the biggest price rally, over half were lower-tier cities.

Against this backdrop, it’s reported by foreign media that China’s top leaders are becoming increasingly concerned about rising property bubbles and debt risks that had come along with the credit stimulus from the city-renovation projects. On October 8, the State Council, China’s cabinet, demanded for these cities and counties with surging home prices and not enough unsold homes to revoke the cash compensation policy.

While Beijing is seen to significantly reduce the size of the city-renovation project in the future, it may be hesitant to take back support too quickly amid a slowing economy, Reuters previously reported.


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