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Rise and fall of property market

By Hong Liang (China Daily)
Updated: 2008-09-12 11:43

About three years ago in Shanghai, a group of home owners went to court demanding compensation from the developer of their properties after a price fall. They lost the case.

Fast forward to now in Shenzhen. The same absurd claim is made by a group of disgruntled home owners in a particular housing complex. Instead of going to court, they reportedly gave vent to their anger and frustration by smashing one of the developer's sales offices and threatened to stop paying back their mortgage loans.

Their unruly actions have stirred a storm of controversy in the media and the Internet. Many commentators have sided with the "aggrieved" home owners in that project, arguing that there is sufficient moral, if not legal, ground to seek redress from the developer. But such an argument simply cannot stand the test of reason.

To suggest that the developer had done something wrong by lowering the price of apartments in the later phase of development to promote sales is totally illogical. Obviously, the developer didn't squeeze his own profit margin just to spite its past customers.

Although this particular developer isn't known to have provided the reasons behind his pricing policy, the common problems facing the real estate industry, mainly dwindling market demand and tightening bank credit, are well documented. In such a business environment, it is perfectly understandable for a property developer to try to recoup its capital in as short a time as possible by running down its inventory through discount sales.

As consumers, we must have, at one time or another, paid what we considered to be reasonable prices at the time for goods, only to discover a few days later that they were on sale in the same stores at a fat discount. Most of us would just laugh it off because we knew there was nothing we could do other than kick ourselves for succumbing to our own impulse.

Of course, a million-yuan home is not just any goods. It is, therefore, all the more reason for the prospective home buyer to exercise caution before plunking down the deposit.

When the property market was on the boil, it was common for buyers to make the rush for whatever apartments they could get, believing that if they missed the chance now, the price would have surged to levels they could no longer afford at a later time. Property agents are well known for their skills in exploiting this herd instinct of anxious home buyers to push sales.

In a down cycle, the only effective way to sell apartments is to lower the price. Most developers don't have much holding power because of the highly leveraged nature of their business. For that reason, fast turnover is usually more important to developers than wide profit margins in a sluggish market. If they must lower the price to sell, they'd do it. It's only business.

Other than hurt pride, those people who bought their apartments before the price drop haven't suffered any real losses, unless they are in a hurry to sell. Negative equity is a frightening prospect for any debtor. But owners of properties in the troubled market of Shenzhen should take heart in the fact that in the go-go economy of one of China's most vibrant cities, inherent strong demand and limited supply will help ensure a price rebound after the adjustment, which will eventually run its course.

There isn't really any justification to get so worked up over what's basically a market-imposed shift in pricing strategy by the seller. Any damage to the interest of the earlier buyers is limited to losses in paper only.