Sieren's China: No freaking out

After some euphoria and depression, the Chinese real estate sector is finally becoming more stable, says DW's Frank Sieren.

After the stock market, now real estate. It lasted somewhat longer. But now the real estate market is becoming stable, after the state pulled the emergency brake months ago. This matter is much more explosive in political terms than the slump because far more people are affected by it. Real estate is an important sector of China's economy, comprising about a third of its power.

For many Chinese people, purchasing real estate is the most important means of investing money. Therefore, they were worried about the erratic ups and downs. Now, they can relax a bit. For the first time since the government intervened two years ago, the prices of real estate are rising again in over half of China's most important cities. In May, they had only risen in 29 cities and now it's 37. The estimates for July are even higher.

China's economic development is uneven

Real estate sales are also stabilizing: There was 10 percent growth in the first half of this year, which is largely down to the month of June because in the first five months the figure was only 3 percent. June - when the stock market collapsed - was also the month which marked the long-awaited end of the 15-month-long real estate crisis. Whether there is a correlation between the stock market correction and the upturn in the real estate sector is hard to tell. What is important to note, however, is that China's economic development is uneven - contrary to what is often believed in the West. It is not only downhill.

The construction sector is doing better because the government has slackened the reins. Since last summer, everywhere apart from in Beijing and Shanghai, it has become easier again to buy real estate and to obtain building loans. Too little was being built after the government intervened. The prices of steel and cement hit rock bottom. There were far fewer orders for building equipment. So Beijing was forced to do something to counter this development. Now, there are also far fewer vacant apartments. Whereas they would stand empty for an average of 18 months after the state first took action, now they remain unlived in for some eight months only.

It's mainly private individuals who are buying real estate again

The vacant apartments are not only due to the real estate crisis but to the fact that they are part of a Chinese tradition. Owners want to avoid stress with tenants. They are often content with real estate as an investment that gains in value. However, the government's measures have now motivated more private individuals to buy real estate. Depending on the city and region, real estate agencies are giving discounts and the state is giving premiums of between 10 and 50 percent.

Whereas earnings in the private sector have risen by some 13 percent, in the office building sector they have only risen by 1.2 percent and in the commercial building sector they have risen by 1.8 percent. It remains difficult for firms to obtain loans, since the idea is that they should make money with their products and not with real estate.

The number of construction sites is, therefore, not yet growing, but it is decreasing much more slowly than last year. This is the right path. And one that is given too little attention in the West compared to the stock exchange slump.

More calm would do the real estate market good

However, this remains a game of artificial skyrocketing highs and terrible lows. The government hands out amphetamines and then it gives out anti-depressants. Nonetheless, at least there are drugs and these have a rapid effect. The freaking out that the West had feared has not taken place. Yet, this is not a normal market-regulated atmosphere. It would be good for China's real estate sector to experience a calm and sanguine period. However, this is easier said than done. As we recently saw on the stock market, Chinese investors tend to become euphoric quickly and to take risks lightheartedly.

Not everybody should invest immediately. There's still plenty of potential in the construction sector. In the next 15 years, an estimated 230 million people will move from the country to cities in China. The country's urban population, which already makes up 55 percent of China's 1.4 billion inhabitants, will grow by over a billion. The problem with such potential is that those who invest earlier and enter the game when prices are low are likely to get rich more quickly. That's why China's government is going to need tranquilizers for some time to come. It will take some time before China's real estate investors become moderate and patient, simply pocketing their reasonable, annual earnings for a later date.

DW's Frank Sieren has lived in Beijing for 20 years.