China Developers Slash New Home Prices

New Economics: China's developers are slashing prices on new homes as inventories continue rising.

China’s residential developers have begun slashing home prices in response to rising inventories and slowing demand due to central government measures to tame soaring prices.

In Beijing China Vanke, the nation’s biggest developer, is slashing prices in its Jinyu Vanke development in the Changping District 17.6% to 14,000 yuan ($2,204.70) per square meter in November. That’s 3,000 yuan lower than posted prices in October, attracting a crowd of more than 600 prospective buyers.

China Vanke is leading the price cuts in south Guangdong province as well. Other top developers are falling in step. Agile Property, Capital Group, Evergrande and R&F Property have all cut prices in an effort at reviving flagging sales.

But developers face substantial hurdles to price cuts that are too precipitous. For example, in Shanghai China Overseas was deluged by threats of lawsuits from over 400 existing homeowners when it announced a 30% discount on group sales promotion in its Scenic West Coast project in late August.

At least four real estate projects in Shanghai faced protests when they attempted sharp price cuts. The local government stepped in to require developers to file applications before implementing large-scale price adjustments in either direction.

Protests from existing homeowners can’t change the new economic fundamentals that require developers to cut prices to move homes or face bankruptcy.

In Beijing September and October new home sales totaled only 10,743, 46% fewer than the same period of 2010. For the first 10 months new home sales in the first ten months totaled 69,079 units, down 17.8% year-on-year. Used home sales also plunged 35.8 percent to 101,188 units.

Beijing’s inventory of unsold homes rose to 118,000 units after 9,152 new homes were added in October. That’s the highest level since June 2009, according to the Centaline Property Agency. Even if no new houses were to come online, that inventory would take 22 months to deplete.

The total value of the unsold inventory of 131 listed property companies hit 983.8 billion yuan ($147 bil.), a 44.93% year-on-year spike. In the third quarter home inventory jumped 12.31% over Q2. This has produced a collective negative cash flow of 63.25 billion yuan ($9.6 bil.).

Analysts see price cuts becoming even sharper in the 4th quarter in Bejing, a bellwether for the rest of the nation. However, they also project that prices will reach an inflection point around next March when they should stabilize even if price controls are kept in place.

In October average home prices in China’s 100 major cities fell for the second consecutive month to 8,856 yuan per square meter (about $135 per square foot), down a 0.23 percent in October from September, said the China Index Academy.