In December 2015, China’s central leadership held a closed-door Economic Work Conference in Beijing, which was followed by an announcement acknowledging challenges in China’s housing market and pledging to tackle the property inventory issue in 2016.

China’s housing market started 2015 with subdued sales, but ended on a strong note, thanks to the government’s accommodative policy stance. Looking back, the easing measures were primarily focused on the demand side, aiming to improve buyers’ affordability through reduced down payment requirements and lower mortgage rates, etc. As shown in the chart below, overall sales volume for 20 major cities surged 28% y-o-y in 2015. However, price trends diverged across different city tiers due to their inventory levels. In Tier 1 cities like Shenzhen and Shanghai, price growth has accelerated as inventories fall sharply, and prices in Tier 1.5 and 2 cities also are gaining momentum. In contrast, Tier 3 and 4 cities still face mounting inventories, which weigh on China’s broader economy.

Chart: Residential sales volume for 20 cities in China

Note: The 20 cities are Beijing, Shanghai, Guangzhou, Shenzhen, Changsha, Chengdu, Chongqing, Dalian, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Suzhou, Tianjin, Wuhan, Wuxi, Xiamen, Xian and Zhengzhou.
Source: CREIS, JLL Analysis

Although details remain unclear, it is known that the government is making reducing property inventories in Tier 3 and 4 cities a policy priority for 2016. We may see officials roll out additional demand-side measures – such as further reductions in down payment requirements – which would help alleviate short-term concerns caused by high inventories. Nonetheless, over the medium and long term, we believe that the health of housing markets in China’s lower-tier cities will depend instead on supply-side reform, which is becoming the latest buzzword among China’s leaders and economists.

China’s macro policy tended to focus on demand-fuelled reforms for much of the past three years, but the effectiveness of such measures has been diminishing. In a turning point for macro policy, the central government vowed instead to roll out and deepen supply-side reform. Such reforms will entail changes in regulations on labour, land, capital markets, tax regime, regulatory barriers, administration, and more in order to generate new growth engines to boost China’s long-term growth prospects. Shanghai has been on the frontier of this reform with initiatives like the Free Trade Pilot Zone (FTPZ). As the government extends supply-side reforms to other parts of the country, we would do well to ask: which Tier 3 and 4 cities are best positioned to benefit and achieve a turnaround in the coming years?

As detailed in our China60 report, benefiting from infrastructure development and strong clusters in some industries, certain Tier 3 and 4 cities like Guiyang and Huzhou have done well, and we believe they have the potential to digest their property inventories over time. Going forward, China will continue to invest heavily in infrastructure to create modern, well connected cities. But to succeed over the longer term in the market-based economy, Tier 3 and 4 cities will need to look beyond measures aimed purely at stoking GDP growth and consider other factors – such as the quality of talent, the presence of robust, symbiotic industrial clusters, environmental conditions, and ‘quality of life’ – that will make them more attractive locations in which to live, work and do business. Whatever the combination of factors, it will be the attractiveness of a location that determines where businesses locate and people move and consequently the ability to absorb the inventories in China’s lower tier cities.

Chart: China60 city evolution curve, 2015 – Tier 2 and 3 cities

Source: China60, JLL

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