China, S.Korea must do more to avoid property crash

China and South Korea have moved to prop up their frazzled housing markets but probably need to do much more to avoid major price slides that could ruin developers, damage banks and threaten the region’s economies.

A share price collapse this week for Chinese property developers such as Guangzhou R&F and China Overseas Land suggests that many investors believe a housing market bust is on the cards, despite a policy U-turn by Beijing.

“Investors might just be throwing in the towel,” UBS analyst Eric Wong said of the sharp drop, which saw some stocks lose as much as 35 per cent of their value over Monday and yesterday.

The Chinese government, fearing a price bubble, was in market cooling mode only a year ago, squeezing developers with a clampdown on loans and hatching moves to stamp out speculation.

New home prices then slumped by up to 40 per cent in the southern cities of Guanzhou and Shenzhen as sales dried up, and property firms began slashing prices across the country to keep cash flowing in.

The outlook grew even dimmer as the global credit crisis began to buffet Asia and batter its financial markets, stalling the region’s once-roaring economies.

So last week Beijing unveiled cuts in taxes, mortgages and down payments on homes in an effort to breathe life into a property industry that accounts for about 10 per cent of gross domestic product (GDP) in the world’s fourth-largest economy.

But the country’s biggest developer, China Vanke Co, reported yesterday a 13 per cent decline in net profit and a nearly 30 per cent drop in sales volume, in another reminder of how deep-seated the problems are.

If the housing market fails to perk up, analysts say policy makers will probably resort to macro-economic measures to spur demand, such as cutting taxes and interest rates.

“The usual monetary cocktail is a blunt instrument but it’s longer lasting,” said UBS’s Wong, adding that Beijing might also raise export subsidies and hike pay at state companies.

On the property side, the government could reel back on its measures to dissuade people from buying apartments as investments and tell banks to start lending to developers again, Wong said.


In South Korea, where around half the country’s personal wealth is tied up in property, the government pledged 5 trillion won (US$3.4 billion) last week to buy unsold homes and land from developers to prevent mass bankruptcies in the industry.

An interest rate cut of 75 basis points followed on Monday as policy makers tried to keep the global financial storm at bay.

The steps are a reaction to slowing economic growth and a steep climb in the number of unsold new homes on the market, which rose 43 per cent to a record 160,595 units in July from the end of 2007, according to government data.

Just as in China, the government had a hand in slowing the market in early 2007, tightening restrictions on mortgages and buying second homes.

Analysts believe freeing up finance for homebuyers is the answer, not just taking homes off the market. Apartment prices in the most expensive districts in Seoul and in satellite towns have fallen up to 20 per cent from their peaks in 2006.

“The measures came too late and are too weak,” Daiwa Institute of Research analyst Hyo Yim said of the government’s action to shore up the property market.

The government should loosen rules on mortgage lending and cut back taxes on owners of two or more homes, Yim said.

Mortgage debt in South Korea is still only a quarter of GDP, compared to 61 per cent in Australia, and 105 per cent in the United States, according to CLSA. In China, home loans equal only 12 per cent of GDP.

“The government cracked down on so-called speculative buyers, but people won’t buy homes if they don’t expect prices to rise,” said Yim, adding that the housing market would probably not recover before 2010.

Many of South Korea’s 12,000 builders face a cash crunch as credit dries up and home sales slow, with 88 firms defaulting in the first nine months of 2008, up 17 per cent from a year earlier.

Even top developers are not immune to such worries, with shares in GS Construction, Hyundai Development and Samsung Engineering tumbling between 37 and 50 per cent in the last month.

But some analysts are suggesting that South Korean construction stocks may have bottomed thanks to the government’s actions, with valuations at historical lows and at a 30 per cent discount in price/earnings terms to the overall stock market.

BNP Paribas analyst Jae Rhee has a 12-month target stock price for Hyundai Development that is double its current price. And the potential upside for GS Construction and Samsung Engineering is about 70 per cent, he wrote in a report last week.

Chinese developers are now trading at near 70 per cent discounts to net asset value, and at 7.4 times forecast 2008 earnings, according to Citigroup analyst Oscar Choi, who believes the stocks have been sold off “indiscriminately”.

And Beijing will do all it can to stop a property market crash, said CLSA analyst Nicole Wong, who has a buy rating on New World China Land and Agile Property.

“Policy is very supportive; basically they’re underwriting a put option on market,” she said. “For sure the government will take further steps if the downward spiral doesn’t stop.” - Reuters

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