China’s Geographical Divide from the Sluggish Zhengzhou Property Market

In the central Chinese city of Zhengzhou, a few blocks from Apple’s largest iPhone factory, a residential project under construction has seen prices drop by 10 percent in a year, and sales manager Lina Wang has introduced an unusual incentive to solicit business.

Normally a 30 percent down payment is required to buy a Home, but the sales manager offered to put down just 5 percent and then make up the difference with a two-year interest-free loan from the developer.

“We had hoped that Foxconn’s expansion would attract migrant workers and boost residential sales. But things didn’t work out that way, and we had to do what we could to make ends meet.” Foxconn is the world’s largest foundry manufacturer, having established a manufacturing base in the city of 10 million 10 years ago.

Lina Wang is just one of a number of local developers who are coping with weak housing prices and sluggish sales. Many inland cities are facing similar problems.

In China’s coastal hubs, however, a real estate boom fueled by speculation has prompted developers to raise prices and select sellers by lottery.

The contrast between China’s booming coastal cities and struggling inland centers offers a glimpse into the country’s widening geographic divide that threatens to derail the recovery of the world’s second-largest economy in the wake of the new crown Epidemic.

“Zhengzhou has historically had a problem with oversupply of housing, and the New Crown epidemic has made this problem worse.” Larry Hu, an economist at Macquarie Group in Hong Kong, said, “The situation will worsen over the next 12 to 24 months.”

Residential sales in developed markets, led by Shanghai and Shenzhen, both soared after the Chinese government managed to contain the outbreak, but Zhengzhou’s property market remained weak.

Official data showed that residential transactions in Zhengzhou fell by nearly half in terms of housing space in the first two months of the year compared with the same period in 2019. In contrast, residential transactions in the top 10 coastal cities rose 76 percent within the same period.

With demand not strong, housing supply is at a dangerous level. It would take developers 15 months to sell out of Zhengzhou’s inventory, assuming no new properties enter the market, according to Shanghai-based consulting firm Kerry (CRIC). That’s a high level by industry standards.

An executive at real estate developer Changjian Holding said, “Our priority is to liquidate existing projects, not to push new projects into the market.” The company has spent more than two years trying to sell a residential complex on the outskirts of Zhengzhou.

In previous years, Zhengzhou had seen a construction boom while a government crackdown on speculation curbed demand.

Real estate construction in Zhengzhou started to get hot in 2016, when coastal cities imposed restrictions on purchases and other measures to curb a real estate bubble, prompting investors to flock to Zhengzhou, which has no restrictions and is a central business hub.

A year later, however, the buying boom ended when Zhengzhou introduced measures to control real estate prices, placing restrictions on both buyers and sellers of homes. Following a 62 percent spike in 2016, new residential sales in Zhengzhou plummeted by more than a third in 2017.

Wang Yan, an investor who made more than 1 million yuan from investing in Zhengzhou properties in 2016, said, “Zhengzhou’s period as a speculative paradise ended when the government banned people from selling their properties within three years of purchasing them.”

While home sales were a roller coaster ride, the building boom continued then. The total number of new housing starts in Zhengzhou between 2016 and 2019 is more than the previous 10 years combined, according to official figures. Developers say they are willing to invest in the capital city of Henan province – which is home to more than 100 million people – because of the belief that people from nearby cities will continue to move into Zhengzhou.

“There is no other city in Henan Province that can compete with Zhengzhou in terms of job opportunities and educational and medical resources.” An executive at local developer Youwell Land (Youwell) said, “That’s enough to push up the real estate market.”

While Zhengzhou does attract foreigners, most of them work in low-paying manufacturing and service jobs, which can’t support them buying homes there.

A mortgage to buy an average one-bedroom home in Zhengzhou’s aviation port economic zone, where Foxconn’s large factory is located, would require monthly repayments of more than 4,500 yuan ($690). The average Foxconn employee earns less than 5,000 RMB per month.

One Zhengzhou Foxconn worker, Li Chaoyong, who earns 4,800 RMB per month, said, “With my current salary, I won’t be able to afford a house in Zhengzhou in recent years.”

There is no quick fix for this problem. Zhengzhou’s economy relies heavily on labor-intensive manufacturing, an industry known for its low wages. The city is located in one of China’s least urbanized provinces, and it has yet to make much headway in developing high-value-added industries such as financial or Internet services.

With little hope of a quick rebound in the property market, once-ambitious developers in Zhengzhou have begun to contract. With many developers opting to suspend construction, the city’s residential land sales – a leading indicator of real estate investment – fell by more than a third year-on-year in the first two months of the year.

“The worst days are not over yet.” said an executive at the Zhengzhou branch of China Merchants Property Management Co.