House prices are soaring in big cities, but oversupply plagues much of the
country
Mar 12th 2016 | SHANGHAI
SHANGHAI, China s financial centre, does not make it easy on outsiders wishing
to buy homes. Non-residents who are single are banned from buying property. The
married are welcome but only so long as they have paid local taxes for two
years and make nearly a third of the purchase in cash. Shenyang, China s
biggest northern city, is far more welcoming. Anyone can buy a home there. All
to little effect: housing prices in Shanghai, five times more expensive than
those in Shenyang, have risen by 20% over the past year; those in the northern
city have edged down.
This bifurcation is a worry for the government, which wants to spur growth
without inflating bubbles. A divergence in housing prices between wealthy
cities and the hinterland is a familiar problem in other countries just look at
London and Lincolnshire, say, or New York and Nebraska. But the divisions are
starker in China. In its most prosperous cities, already giddy prices continue
to shoot up, while unsold flats pile up in markets where valuations were low to
begin with. Moreover, construction has long been one of the economy s main
engines, accounting for as much as a quarter of GDP growth until recently. This
makes it especially important that the government get the balance right. Doing
so is proving hard.
Over the past half-year, the government has unveiled a series of measures to
support the housing market that specifically exclude China s five hottest
markets (Beijing, Guangzhou, Sanya, Shanghai and Shenzhen). People buying homes
need only make a 20% down-payment to obtain a mortgage, except in the five
conurbations, where they must put down 30%. By the same token, in most of the
country transaction taxes have been cut by as much as two-thirds for people
buying second homes; in the five outliers they have been left unchanged. In
Shenzhen, a southern tech hub that is the frothiest market, with prices up by
53% in the past year alone, local officials have vowed to crack down on
speculators and expand the supply of affordable housing.
The results of this two-tier system have been meagre so far. The frenzy in the
biggest cities stems from the central bank s steady loosening of monetary
policy over the past 18 months. Although warranted from an economic
perspective, it was inevitable that low interest rates would drive asset prices
higher. Initially, much of the credit pumped out by banks ended up in the
stockmarket, but following its crash last summer, property beckoned as one of
the few decent investment options in China (capital controls, which have been
further tightened recently, make it hard for Chinese savers to invest their
money abroad).
For speculators looking at property, the excess supply in smaller cities was
all too evident, so they turned instead to the megalopolises. Du Jinsong of
Credit Suisse describes it as a form of groupthink. Everybody investors,
developers, policymakers and bankers thinks that first-tier cities are safe,
he says.
Even as the government tries to restrain the excesses, however, it does not
want to snuff out the rally in the big cities altogether, for they tend to
influence sentiment elsewhere. There are signs that this is beginning to
happen. Housing prices started rising month on month in the biggest cities a
year ago. In midsized cities (in China, those with populations of 5m-10m),
prices have been rising for the past four months. In smaller cities (mere
hamlets of 1m-5m), gains have been evident only for the past two months (see
chart).
If this upturn lasts, some investors reckon it will spur construction.
Commodities used to build apartment blocks, such as iron (girders) and copper
(wires), have recovered slightly from their recent swoon, partly in the hope
that China s property market is also stirring (see article). Indeed, a series
of mini-cycles in the Chinese housing sector over the past decade followed this
sort of pattern: rising housing sales led to new building starts, which in turn
pushed commodity prices higher.
Figures from the China Index Academy, a data provider, show that the stock of
unsold homes has decreased recently, from nearly 30 months worth of sales
early last year to 15 now. A housing market with rising volume and prices
clearly does not support the view that, on a macro level, China s housing
market is oversupplied, notes Liang Hong of China International Capital Corp,
an investment bank.
But there is a further vast increment of supply on the verge of coming to
market, because developers slowed the pace of construction in recent years and
in some cases halted it altogether. There were 4.7 billion square metres of
housing under construction but not yet available for sale at the end of last
year, up by 25% from the end of 2011; 452 million square metres of housing were
on sale, nearly three times as much as at the end of 2011. Some provinces and
cities are drafting plans to convert unsold homes into subsidised housing for
poorer residents. Xi Jinping, China s president, has said that reducing
property inventory is a battle of annihilation that must be won to revitalise
the economy. Revived demand for new construction, in short, is a long way off.
The exception is sure to be China s biggest cities, where there clearly is an
imbalance between supply and demand. Shenzhen and Shanghai, in particular, are
popular with the young and the highly educated, just the kinds of people that
push up housing prices. They are two of China s best-run cities, offering good
transport links, good jobs and, by Chinese standards, good air. Unsold housing
inventories cover just about five months of demand at the current pace of
sales, indicating that more construction is needed.
Even with these strong fundamentals, it is hard to justify a 50% surge in
housing prices over the past year. Regulators suspect that there has been some
foul play. This week they said they would target online lenders that have made
loans to homebuyers to cover their down-payments; these loans have, in theory,
allowed speculators to buy homes entirely with borrowed cash, in contravention
of the minimum down-payment requirements.
But reining in animal spirits is a hard task. At the Baoshan Property Trading
Centre, where people buying homes in a district of northern Shanghai must go to
register their purchases, crowds have swelled to such a size that the local
government has deployed police to keep the peace. On one recent day a phalanx
of security officers in white helmets stood guard alongside barricades as
people lined up to submit their documentation. One of those queuing, Wang Jie,
bought a new apartment for 2m yuan ($307,000) in October, and has watched its
value soar by another 1m since then. No one seems to buy when prices are
falling, he chuckled. But everyone does when they start rising.