Headlines in China have been dominated by the resurgence in land transactions across several major cities over the past several weeks. The trend was epitomised by China Poly’s 18 May acquisition of a residential-use plot in suburban Shanghai for RMB 5.5 billion (equivalent to an accommodation value of RMB 55,707 per sqm on saleable area), 296% higher than the reserve price and some 40% higher than the current sales price of new apartments in the surrounding area. The upswing in land sales has convinced many global investors that real estate investment in China is poised for strong growth. Is China’s housing market really reaching a turning point? To answer this question, let’s take at a look at the sequential path of real estate activity.
One bright spot in China’s latest macroeconomic data was the rebound in new housing starts, which were up 14.8% in 1Q16 compared to a year ago. However, a closer look at the data reveals that the recovery was actually very fragile, with limited basis for a stronger outlook. On a seasonally adjusted basis, new housing starts for China overall have remained low in the past three months, as shown in the chart below. Strong sales in the first three months were not enough to prompt developers to speed up new construction in most Tier 3 and 4 cities, where inventories stay high. The pickup in new starts was mainly limited to high tier cities, which only account for a fraction of China’s total new starts and is not making up for the shortfall of Tier 3 and 4 cities.
Chart: New housing starts in China
Source: CEIC
Despite several rounds of policy easing, the fundamentals of China’s housing market remain largely unchanged, as loosening measures have only alleviated short-term concerns caused by high inventories. The majority of China’s Tier 3 and 4 cities are still struggling to find their growth engines, reducing developers’ incentives to increase investment in these cities. Even sales in higher tier cities are losing momentum as local governments step up efforts to tame soaring housing prices. Many developers who paid skyrocketing prices for land plots in recent months will be forced to delay construction as they wait for prices to grow high enough to justify their costs.
The factors discussed above mean that new housing starts in China are not likely to have a meaningful recovery in the upcoming months. Even if accommodative policy contributes to a continuous rebound in housing sales, we expect it at best it will only allow new starts to stabilise rather than rebound.
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