China’s Housing Market is on the Mend

Postat den 5th September, 2012, 09:17 av John Calverley, Toronto

China’s housing market is turning the corner. Sales have risen, inventories are coming down, and prices have firmed slightly in many cities. Slow new house-building will remain a drag on the economy for some time yet, but should begin to add to GDP growth in 2013. The key drivers of the turnaround are greater affordability and an easing of financing constraints.

Divining the state of China’s housing market is not easy. China has 16 cities or conurbations with a population over 5mn and a further 20 with populations over 3mn, and conditions vary. What is happening in Shanghai and Beijing in the luxury sector does not necessarily represent what is happening elsewhere. Official data on housing is improving, but remains limited and, as with all China’s data, sometimes misleading.

To supplement the available data, at Standard Chartered we have conducted a regular survey of thirty developers in eight Tier 2 and Tier 3 cities, with populations from 3-8mn. Our most recent survey confirmed official data suggesting that the market is improving. Developers are seeing more sales and are beginning to plan increased construction.

Owning property is a powerful ambition in China. For many men it is a pre-requisite for finding a wife given the gender disparity and cultural expectations for a dowry from the male side. And despite the building boom, the vast majority of people in China have still not made the move to a modern apartment block, but would dearly love to. There is a huge underlying demand that is rising with continued urbanisation, and is set to remain rapid for a few more years before levelling off.

China’s housing market is also widely used for investment. Opportunities to earn higher returns on savings have improved for wealthy investors in recent years, with the rapid growth of trust companies. But the stock market is languishing at low levels, so property is the preferred asset class for many.

New apartments in China are typically sold unfinished, with internal walls and electric outlets, but not doors, floor coverings, kitchens or bathrooms. Investors generally leave them unfinished. Buyers in China have a strong preference for new apartments and any chosen kitchen or bathroom might be unfashionable a few years later.

This is a key reason for the frequent observation of empty apartments; usually they are sold, but just left empty. These apartments are effectively treated like a land investment, rather than as an income-generating asset. One implication is that a property investment boom in China does not necessarily reduce rents as it might in the West, which slows any natural rebalancing.

Large investor holdings could be a problem if everyone tried to sell at the same time. But there has been limited distress among owners in this housing cycle because loan-to-value ratios are generally low and many investors have no mortgage at all. They can afford to wait it out.

The spurt in home completions in late 2011 on projects started during the post-2009 bubble phase is slowing, while the amount of floor-space under construction is deep in negative territory. Meanwhile our survey finds buyers returning, attracted by lower prices and local easing in financing conditions. Over time these trends will bring down unsold inventories, which are still high.

I say “local” because the central government has resisted easing up on the housing sector. It is afraid of a sudden return to bubble conditions, particularly given the easing in monetary policy generally to combat the economic downturn. Some cities that tried to loosen regulations too much have apparently been over-ruled. But overall, the evidence is that it has become somewhat easier to get finance than a year ago, at least for owner-occupiers.

Prices seem to have fallen in the range of 5-20%, with a greater fall in new-build than in the secondary market, as is typical after a boom. This may not sound like much, but wages are growing 15-20% in many cities. Encouraging wage growth is a deliberate part of the government’s strategy for boosting consumption, but it also means that housing affordability has considerably improved over the last two years.

Price is the key issue. While prices in Shanghai and Beijing often look breath-takingly high, arguably this reflects their “world city” status. In ordinary cities, prices were also becoming high relative to earnings a couple of years ago, sparking social discontent. The signs are that the slowdown over the last couple of years has corrected this, to some degree. But it would not take much to open up a gap again. Hence the government focus on restricting investors, by limiting people to one property only, while encouraging first-time buyers. As the market recovers, expect an increased focus on ways to prevent prices rising too fast, including property taxes and financing restrictions.