Young banker Yan Lei toured the tree-lined gardens, sculptures and fountains of Baoland East Garden, a new Shanghai apartment complex, but he did not buy, deciding instead to hold out for lower prices.

"Home prices in Shanghai have begun to fall, so why hurry to buy now?" said 30-year-old Yan.

He was not willing to spend the 1.96 million yuan (US$242,550) the developer was asking for a 140-square-metre unit. Yan thought less than two-thirds of that would be enough. "The environment is ideal; the prices aren't," he added.

China's most expensive property market has been deflating since June, when new taxes aimed at speculators halted a six-year boom during which prices almost tripled. The slide may deepen as developers increase supply and demand wanes in a city where a typical new apartment costs more than 50 times the average annual income.

"Property prices in Shanghai have risen out of the reach of ordinary citizens," said Qiu Zhicheng, an analyst at Xiangcai Securities Co, who forecast prices will drop 10 percent in the coming year. "It was only a matter of time until prices fell."

Real estate has helped Shanghai's economy expand by 12 percent annually since 1990. The city of 17 million people has built more skyscrapers in those 15 years than there are in New York. China's central bank described the city's second-hand and luxury home markets as "bubbles" in a report issued in August.

Home prices dropped by 7.9 percent between June and October, according to the city government's Shanghai Home Index, which has not reported a more recent figure. The index more than doubled between December 1999 and May.

'Selling spree'

The steepest declines since then have come at new apartment projects, as developers such as China Vanke Co, Shanghai Shimao Co and Shanghai Industrial Development Co try to raise cash to meet year-end bills and finance new developments.

"Developers need to pay construction contractors at the year-end and balance their books," said Chen Sheng, vice-director of the Shanghai Real Estate Index Office. "That's triggered a selling spree."

The amount of new apartment space on sale in Shanghai jumped to 9.66 million square metres as of Tuesday almost three times the 3.59 million square metres on the market at the end of 2004, according to city government figures. Home sales this year reached 26.8 million square metres by mid December about two-thirds of the 34.9 million square metres sold in 2004.

"We had to cut prices in order to sell the remaining stock," said Qian Zheng, sales manager at the development, which is asking an average of 9,300 yuan (US$1,148) per square metre, down from 13,000 yuan (US$1,605) at the peak earlier this year. "We need the cash for the development of another project."

Shimao Riviera Garden, a high-end project in the city's Lujiazui financial district, reduced asking prices to 26,000 yuan (US$3,210) per square metre from a peak of 36,000 yuan (US$4,400) in March. Vanke, the nation's biggest publicly traded developer, cut prices for its developments in Shanghai by as much as 20 percent in September to spur sales, according to board secretary Xiao Li.

Slowing demand has prompted some developers to offer perks such as free plane tickets and air conditioners, while others are guaranteeing refunds in the event of further price declines a tactic used by Hong Kong developers after 1997, when the city's real estate prices slumped by 60 percent.

Bags of cash

It's a turnaround from the pre-June boom, when would-be buyers sometimes had to wait in line for days to register for popular developments, and local newspapers were peppered with stories about rich entrepreneurs from Wenzhou and other cities arriving with bags of cash to invest in real estate.

"I brought a chair with me and sat all night," said Ding Ou, 30, who bought a home in the city centre in 2002. "The market was crazy, and it got much crazier afterwards."

Darkened windows became a common feature of the night-time cityscape, as developers and speculators stockpiled vacant apartments in anticipation of further price increases. Prices jumped 19 percent in the first quarter of 2005 from a year earlier, prompting central bank Governor Zhou Xiaochuan to say Shanghai's home prices were worthy of "concern and attention."

The central bank in March raised the minimum interest rate lenders must charge on home loans and encouraged them to demand bigger down payments. After those measures failed to dampen price gains, the central government ordered local authorities to apply a 5.5 percent tax on the sales price starting in June.

The State Council said in March that rising property prices are threatening financial and social stability in China, in a six-page circular that ordered local governments to take steps to curb "excessive" growth.

In Shanghai, a 100-square-metre new apartment costs an average of 914,000 yuan (US$112,800), according to the Shanghai Real Estate Exchange. That's 55 times last year's average disposable income of 16,683 yuan (US$2,059). The comparable ratio for the UK is 5.5, according to HBOS Plc, the nation's biggest mortgage lender.

(China Daily December 15, 2005)