ix months ago, Shanghai's property market was the hottest on the planet. The story was compelling: the most dynamic city in the most dynamic economy, with affluent Chinese from both the mainland and abroad eager to pour their capital into the latest deal. Even foreigners were getting into the act: Morgan Stanley (MWD ) was part of a $90 million real estate fund for Shanghai, and individual Americans were plunking down their bucks for Shanghai flats and houses.
The whole world, it seemed, wanted in on the game. Who cared if speculators were buying and selling
shanghai apartments within days? Prices had been clocking 30% annual increases from 2002 on.
Today, says local real estate agent Anthony Ip, "the situation has reversed completely." Ip recalls how developers once would hang up on him if he dared to question the price of a new property. Now desperate developers are offering perks like free parking spots, country club memberships, and even free autos as incentives. Not only have prices of some luxury apartments dropped by as much as 30%, but sales volume is off by 70%, say Ip and other agents.
Shanghai is the latest victim of the government's effort to cool a rocketing economy. Last year, Beijing made it much harder for consumers to borrow to buy cars: The result was a sharp downturn in the auto market. Now it's real estate's turn. Ever since Shanghai's government slapped a series of taxes and other levies on real estate transactions in June in an effort to rein in speculation, prices have been sliding.
How serious could things get? Very serious, according to Credit Suisse First Boston's (CSR ) Dong Tao, chief economist for Asia ex-Japan in Hong Kong. He reckons mortgages account for 40% to 50% of all bank lending in Shanghai and that Shanghai property lending accounts for a fifth of all mortgages countrywide. A Shanghai crash could slam China's already shaky banks. Property generated about one-quarter of Shanghai's 14.3% growth in gross domestic product last year. Moreover, while Shanghai accounts for just 5.4% of China's GDP, a crash could have a ripple effect. "It affects demand for materials and electronics, insurance and mortgages. It's the source of fiscal revenues and consumer confidence," Dong says. "If we see a major dip in Shanghai it will be a substantial risk to the national economy and the global commodity market."
Within the city itself, the drought of property sales has put a damper on what might be called the hustle economy. Some 4,000 small property agencies have closed their doors in the past three months. Speculators who bought flats by the half-dozen with the notion of flipping them have been left holding the keys -- stuck with empty properties and big debts to the banks.
