UBIQUITOUS DROP: Home prices and sales have been falling in major
cities, including Guangzhou, where this new housing project is located.

When Meng Qinghai, a correspondent for China Central Television, traveled to Shenzhen in July, he discovered a disturbing situation-one similar to the U.S. subprime mortgage crisis had emerged in one of China's most economically developed cities. Some home buyers there reported that they had stopped making their monthly payments on their mortgages. The reason was simple: When their home prices dropped, their houses became negative assets.

Meng interviewed a woman surnamed Li who at the beginning of the year purchased a one-bedroom apartment in a common community in Shenzhen with mortgage loans. But after making her mortgage payments for three months, she stopped and abandoned her apartment. The price of Li's apartment had dropped to less than 300,000 yuan ($43,900), although she had to repay loans totaling more than 400,000 yuan ($58,600).

Meng found that Li was not the only home buyer who stopped paying her mortgage bills. Many others did the same, and some of them had even been sued by the banks that issued their mortgages. As in Shenzhen, the real estate markets in cities such as Guangzhou, Shanghai, Beijing, Nanjing and Changsha have shrunk by various degrees.

According to the real estate information portal Soufun.com, the monthly decrease of housing transaction volumes all surpassed 20 percent in Beijing, Shanghai and Shenzhen from the end of May to the end of August. In Shenzhen, the monthly decrease was more than 40 percent. At the same time, the year-on-year decrease of housing transaction volumes in the three cities surpassed 50 percent for three consecutive months.

In an interview with Beijing Review, Liu Hongyu, Director of the Institute of Real Estate Studies at Tsinghua University, believes that although house purchasers across the country may not suspend mortgage payments, people in some cities with severe real estate bubbles should be vigilant. Banks in particular should be well prepared before it is too late, he said.

Faced with continually falling housing prices and shrinking transaction volumes, real estate developers have been calling for the government to do something to rescue the market. Ren Zhiqiang, President of Beijing Huayuan Group, said at the Boao Forum for Asia Annual Conference 2008 in April that if the government did not rescue the real estate industry, banks would collapse much earlier than real estate developers, because they issued large amounts of money to developers.

Calls for an SOS

On July 7, the Shenzhen Bureau of Land Resources and Housing Management released an analysis of the development of the city's real estate market in the first half of 2008. It offered some suggestions about how the municipal government could rescue the ailing market, such as reducing or exempting transaction taxes and moderately relaxing the country's monetary policy.