China’s property market has been slowing since the beginning of the year. The sales of new homes in big cities is down 20 to 30 percent compared to last year, and the ratios of homes in stock to those sold in many of the cities have been large.
In September, 69 of the 70 cities monitored by the National Bureau of Statistics (NBS) saw home prices fall compared with the previous month. Viewed year on year, however, the prices have risen a bit.
Is the demand for properties in China falling far short of supply? According to data from the NBS, homes built far exceeded demand before 2005. Starting that year, and with the only exception being 2009, the combined area of commercial residential properties sold every year has been greater than the area built. In fact, due to rapid urbanization, the demand for homes has consistently outpaced supply by 140 million square meters every year.
Judging by this broad picture, the demand for properties has remained greater than supply and that is the reason home prices have increased.
Whether the property market collapses has a bearing on everyone. If we divide everyone’s assets into properties, securities and bank deposits, properties would be worth 220 percent of the country’s GDP, securities 12 percent and bank deposits 82 percent. That means urban residential properties are worth only 2.6 times deposits. The ratio in many European countries and the United States is often around 10 times.
Mortgage loans account for only 14 percent of Chinese banks’ loans and amount to 21 percent of all resident deposits. The requirement for a down payment is 30 percent, but many buyers are willing to pay more to reduce interest payments. All these factors mean that Chinese people are very resilient against a sharp fall in home prices and a slowdown in the market.
The country’s home prices are not outrageously high when put on a global scale. The average home price in Shanghai has almost reached US$ 7,000 per square meter. In India’s Mumbai, although the average per capita income is about one-fourth that of Shanghai, the cost of one square meter of house is around US$ 11,600.
Many people have made a mistake regarding the development stage of a country when comparing China with other countries. Some have argued that, for example, the property market resembles that of Japan in the late 1980s when its market was about to collapse. The thing is, at that time, Japan had completed urbanization and become a high-income country. Its banking industry had too much risk exposure to real estate-related loans and many of them went sour when land and home prices plummeted.
But China is a different story: It is not as urbanized yet and many Chinese who dwell in cities do not hold a local urban hukou, or residence registration papers. That’s why for some time to come the process of urbanization will only gain speed.
In the next 10 years, about 200 million people will migrate from rural areas into cities, data from the State Council’s Development Research Center shows. Progress in urbanization will help developers digest inventories.
This is not to say the market does not face challenges. In fact, there is a risk it will continue to slow.
One reason is simply that it had grown faster than many others. Among Asian countries, China’s home prices have increased by the second highest growth rate over the past five years. Meanwhile, rentals as a share of a property’s price have been falling to an average of 2.66 percent, lower than what is seen many other countries and regions.
Also, although the ratio of home prices to income across the country on average is not too high, at 6.3, in the biggest cities, it is getting higher and higher. In Shanghai and Beijing, for example, the ratio is 8.8 and 11.2, respectively.
Another source of concern is demographic. In Xi’an, capital of the central province of Shaanxi, and Shijiazhuang, capital of the central province of Hebei, during the past 10 years, the annual growth rate of property investments has exceeded 20 percent, while their population has been growing at lower than 3 percent. It is not hard to imagine that cities like these will have a hard time adjusting home prices to reality.
On the other hand, the growth of population in Beijing, Shanghai and Shenzhen has been higher than 3 percent every year for the last decade and their property investments have been growing at less than 20 percent. So they should not face too much pressure in terms of home price adjustments.
It is other cities including many provincial capitals that are most at risk. Their home prices could fall sharply if they do not hurry with reform to the hukou system and lift restrictions on home purchases.
The source of financing for developers is also a risk factor. We have found that only 30 percent of the capital they used for projects comes from down payments made by homebuyers. Some 40 percent is raised on their own, with roughly half of that from shadow banks, which have been hit hard in the global financial crisis. Developers that rely heavily on shadow banks may see their capital chains break.
China’s home prices have been changing, apparently in cycles. There have been two complete cycles, the first from 2007 to 2009 and the second from 2009 to 2012. The third is underway.
The country’s home prices fluctuate widely and hinge to a large extent on the broad economic environment and property regulation policies. Property investments are strongly linked with the growth rate of GDP as well. The property market is undergoing changes because the government wants it to and because the economy has to be upgraded to not rely too much on investments.
That said, many large developers are resilient to market depressions. The top 10 companies among the 65 Hong Kong-listed property developers account for more than 65 percent of their total value and their gross profit margins are at least 30 percent.
Before Japan’s property market bubble collapsed in 1989 and 1990, there was one time during the early 1970s when the country’s home prices fell by about 30 percent from their height in 1972. If we must compare China with Japan, we are at worst where Japan stood in the early 1970s.
What policies shall we employ to prevent home price from plummeting? The short-term remedies should include relaxing property regulations, lifting restrictions on home purchases and easing the terms of mortgage loans. Further, we should hasten the pace of hukou reform and improve the tax system to help regulate the property market. But the tax remedy will come at a price that will bite in the long term.
The banking industry could do more. It is vulnerable to cyclical ups and downs in the property market because of the maturity mismatch between deposits and mortgage loans. If we allow banks to issue collateral bonds, it can help relieve the problem.
We should also diversify the financing channels for property developers by, for example, creating a market for real estate investment trusts. This can reduce the property industry’s reliance on banks.
Last but not least, there has been just too much uncertainty about important information such as the estimates of vacant homes. Transparent data can help policymakers make better judgments about the market.
Today’s property market in China is going through cyclical adjustment pains that the economy can tolerate with per capita GDP at only US$ 7,000. In the next 10 years, another 200 million people will move into cities as urbanization continues. The market’s glory days will not end for at least the next 10 to 15 years.
*The author is the chief economist for greater China at ANZ Banking Group