Are China’s house prices cooling?

March 22, 2017 / By  

It has been one year since Shanghai announced measures to rein in skyrocketing housing prices. Have these measures achieved the desired result? As shown in the chart below, average sales prices in Shanghai dropped, while sales volumes in the primary market more than halved over the past two months compared to a year ago. It would appear that the market’s froth has dissipated. But has it really?

Over the past two months many new projects have reported strong sales, with all units snapped up in days, if not hours. For example, all 294 units in Crystal Plaza Residences – developed by Tishman Speyer in Shanghai’s Pudong District – were sold out when they launched for pre-sale on 19 January. The divergence between falling headline numbers and high-performing individual projects is a result of the local government adopting extreme measures in limiting pre-sale permits.

Chart: Shanghai Residential Sales Prices by Ring Roads
Source: Shanghai Real Estate Trading Center

In addition to adjusting downpayment requirements and purchase restrictions, Shanghai’s government has also stepped up its efforts on pre-sale management. It has required developers to get approvals on sales prices for all new launches. In order to tame headline price growth, the government has only approved pre-sales for units whose prices were well below their market values – a dynamic which has made these new launches particularly attractive to buyers.

A high level of sales in these new projects vindicate our argument that there has been consistently buoyant demand from end-users. We are seeing a similar trend across China’s other top-tier cities, where upward pressure on housing prices remains largely intact, even with a tight policy stance.

A side effect of these tightening measures is that developers reluctant to accept the prices set by local governments are choosing to delay new launches and slow down new construction until such measures are phased out.

More recently, we have observed that housing markets in some lower-tier cities are gaining momentum as investor demand spills over from high-tier cities facing home purchase restrictions. We maintain our view that investor interest will only be limited to a small number of strategically located cities, while the vast majority of China’s Tier 3 and 4 cities will continue to face headwinds in clearing excessive inventories given their unfavourable demographics.  This may affect growth in China in 2017, as developers in both high-tier and low-tier cities are likely to slow their rates of construction as a reaction to tightening measures in the former and tepid sales recoveries in the latter.

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