Two years ago, Zhang Kai put down US$66,716 on his dream house in Beijing's Tongzhou district. It was scheduled to be completed in June 2008.

Zhang was disappointed, but not surprised, when the completion date was pushed back to the end of 2008.

Now he's starting to worry. The completion date has been pushed back again, to September 2009, and Zhang says he doubts the developer has the money to finish the project.

Welcome to China's real estate market, 2009 edition.

Prices have started to moderate, but there is a glut of houses on the market. Developers are short of cash and willing to deal, but not enough to suit consumers, who are waiting for even bigger price cuts.

Everyone is concerned about the real estate industry, from Zhang Kai to the National People's Congress. Despite the current problems, however, no one expects a US-style meltdown.

After years of skyrocketing prices, China's housing market seems to have reached a breaking point.

Nationally, housing prices in 70 major cities declined 0.4 percent in February, compared to the previous month, and 1.8 percent compared to a year ago.

Units at the Thomson Riviera, considered one of the most expensive housing complexes in Shanghai, went on sale in 2005 for US$16,080 per sq m. To date, only four have been sold, and the developer is rumored to be offering sharp discounts.

China Vanke, the nation's largest housing developer, began cutting prices around Spring Festival, causing competitors Greenland, Poly, and Kerry Properties to follow suit.

Vanke's sales dropped by 8.6 percent last year, to US$7 billion, while its assets decreased by US$185 million. The company expects to reduce its asking price for unsold units in 13 projects by US$179.8 million.

This year, Vanke's sales rose by 19 percent in January and 150 percent in February, compared with a year ago. Sales by Poly Real Estate Group Co, the nation's second largest developer, tripled in February.

At an ongoing real estate fair in Beijing, 26 developers have offered discounts ranging from 2 to 16 percent on more than 2,300 new homes. The price of some villas in the Beijing Economic-Technological Development Area has dropped by 25 percent to US$882,352-US$1.1 million; apartments in this area have also been cut by some US$150 per sq m to around US$800 per sq m.

Even at these discounts, however, it will take years to sell off the existing inventory of new homes. Beijing has some 144,933 unsold homes, with a total floor area of 18.8 million sq m, according to Yahao, a leading real estate service corporation.

Nationally, there are 210 million sq m of unsold houses; E-House China's Research and Development Institute estimates they will take three years to sell. And builders are sitting on some 1.19 billion sq m of land that has yet to be built on.

So far, however, many consumers are not impressed.

Liao Xiaoyong and Liu Yanxi, a newly married couple in Beijing, have postponed looking for an apartment, hoping the prices will drop further. In the meantime, they have hired a carpenter to make their furniture, hoping this will save them money in the long run.

"Since I met my wife three years ago, prices have gone up way beyond our ability to pay," said Liao. "At this point, I think it's better to wait. I don't see prices rising again any time soon."

Analysts expect overall demand to drop this year, as buyers like Liao and Liu wait out the market. Morgan Stanley has forecast a drop in the share prices of such leading developers as Aoyuan (26 percent), Hanglung (45 percent) and Country Garden (60 percent).

Still developers can only go so far to woo buyers, as their operating capital dwindles.

"Most of them will not admit it, but half of the developers out there do not have enough capital right now," said Jerry Lou, an equity stategist at Morgan Stanley.

In recent years, many of the heavyweights in China's real estate industry went public, hoping to raise foreign capital. When the global economic crisis hit, this strategy backfired in many cases.

Housing giants like R&F, Country Garden, Shimao, and Greentown are now listed on the Hongkong exchange. Last year, however, the price of their shares all plunged by more than 80 percent.

The health of the housing market is a source of national concern.

"The situation now is that developers and local governments are unwilling to let housing prices go down substantially. But unless they sell more homes, it will start to affect suppliers of everything from steel to furniture to appliances," said Lou.

Housing is also a key source of new jobs. The number of construction workers has been growing at an annual rate of 6.6 percent, and hit 2 million last year. Overall investment in housing reached US$447 billion in 2008.

Although housing is not one of the 10 key industries targeted for revitalization by the government, it has been a hot topic at the annual sessions of the NPC and the Chinese Peoples Political Consultative Conference (CPPCC) in the past two weeks.

Xu Jiayin, the chairman of Evergrande Real Estate Group and also a member of the national committee of the CPPCC, recently called on the central government to control land costs, taxes, and profits of real estate companies in order to cut housing costs.

Xu also suggested lowering or abolishing the 100 or more different taxes paid by the real estate industry.

The government has already cut interest rates five times, eliminated several taxes, and provided a 30 percent discount on some mortgages.

After several years of explosive growth, there is no doubt that China's real estate market is in for a correction. Vanke, which had predicted that the market would hit bottom this year, now says it expects things to get better in 2012. Other analysts suggest that a recovery may take as long as five years.

But almost no one expects the bottom to fall out, as it has in the US. Lenders in China have been far more prudent than their American counterparts. A 20 percent down payment is mandatory; Chinese borrowers typically have impeccable credit, and no one is pedaling derivatives.

If Chinese developers adjust their profit margins and keep housing affordable, the market will stabilize, according to Yi Xianrong, a researcher at the Chinese Academy of Sceinces. China must keep in step with the global economy and learn from it, he said.

(China Daily March 16, 2009)