Prospective homebuyers enquire about an upcoming residential property at a Beijing real estate fair. Recent measures against speculative property investments are said to be pushing demand from top-tier cities to small cities.
Transactions are down too, but demand shifts to lower-tier cities, sparking concerns
Recent measures against speculative property investments have begun to have the desired impact of reining in runaway preowned home prices and cooling the transaction frenzy in top-tier cities like Beijing and Shanghai, said analysts.
But the unintended side-effect is that demand is shifting to smaller cities where prices of both homes and land are surging.
According to Yunfang Data, a property information provider, 10,802 preowned homes in Beijing were transacted in May, down almost 36 percent from April and the lowest in the past 27 months.
The average price of preowned homes in Beijing dropped 0.72 percent in May to 69,493 yuan (,224) per square meter from the April level.
According to BA Consulting, the average price declined some 2.4 percent between April and May.
"As transaction volumes continue to drop, the average price is likely to decline further," said Kong Dan, a researcher with BA Consulting.
Sales of commercial-titled apartments to individual buyers were barred. So, such flats, which were part of the preowned homes market, are no longer part of supply.
As for Shanghai, according to qianzhan.com, another industry information provider, 14,600 preowned homes were transacted in May, down more than 5 percent from April.
The average price in Shanghai, however, did not budge much, staying around 72,000 yuan / sq m in the central area and 43,000 yuan/sq m in suburban areas.
One of the reasons is that supply of land parcels for new residential projects in Beijing and Shanghai is limited.
This sets limits on both incremental supply of, and transactions in, the preowned home market. So, existing supply dominated transactions in the two cities' central districts.
Shanghai housing authorities said earlier this month that the changes in the situation are proof that "market-specific policies" are taking effect.
Tighter lending norms meant that prospective homebuyers are no longer able to afford down payments for apartments.
Shanghai realty agents said transactions in the preowned home market are "sloppy" because both supply and demand are "bearish".
According to the National Bureau of Statistics, which monitors the average housing price in 70 cities, Shanghai's home prices have fallen 0.2 percent.
"After April, when the average price started to drop slightly for the first time in the past few years, many sellers withdrew from the market. They fear that deals at a time of falling prices would cause loss of value. They expect prices to recover later. But homebuyers have suspended buying, waiting for further price cuts," said Luo Weijuan, 29, an agent with Minyu Real Estate in Jing'an district.
"Some sellers, fearing that prices would drop further quickly, are open to bargaining, but they insist on payment in cash in lump sum."
She estimates that the average price of a preowned home in central Jing'an district has dropped some 4 percent in the past two months.
At the same time, for some spacious apartments that command a high price, the price cut could be as much as 10 percent, as long as the buyers are able to pay upfront using debit cards or bank checks.
In some smaller cities neighboring top-tier cities, such as Jiaxing, which is about an hour's drive from Shanghai, housing prices picked up quickly as a result of the spillover effect.
The average price of preowned homes in the city's central districts was about 5,000 yuan /sq m in June 2015, but rose to some 12,000 yuan/sq m earlier this month.
Yang Kewei, an analyst with CRIC China, a realty information provider, said that the market heat of key cities is now shifting to lower-tier cities, and it is likely that their key regions will heat up next.
"Fresh purchase restrictions may be imposed in lower-tier cities if local decision-makers decide to stabilize home prices," said Yang.
In a research note last Monday, the China Academy of Social Sciences said more home purchase restrictions and tightened monetary policy will weigh on market demand in the short term.
The note predicted that prices in previously red-hot markets like Beijing will continue to fall.
For their part, Shanghai authorities said they will continue to work toward stable and sustainable development of the local real estate market.