A cottage industry has emerged in English-language media to ask whether high price-income ratios mean that China’s housing market is experiencing a bubble. JLL has conducted its own research and concludes that while P/I ratios in China are high, they are supported by fundamentals and remain short of bubble territory.

We assume two income earners per household and a unit size of 90 square meters. Because primary home sales are limited by low inventory and dominated by high-income earners in some cities, we chose to use secondary home prices in our model. The results are displayed in the chart below, which shows that home prices in Shenzhen were a whopping 46 times average income by end-3Q17. All Chinese cities are substantially higher than the US P/I average of 2-4.

Figure 1: Home Price-Income Ratio by CitySource: CEIC, CREIS
Calculated as avg. mass market secondary home price over avg. disposable income per household.
Assumes 90-sqm per unit, 2 contributing incomes.

High Chinese P/I ratios are supported by range of factors, several unique to the China market:

High savings rates, parental financing support –China’s 1990s’ housing privatisation enabled many urban residents to purchase their socialist housing units for prices under market value. Urban household wealth ballooned in the following decades as home prices rose, creating a generational pool of savings. Today’s parents and grandparents can leverage that wealth to help newly married children buy homes, pushing prices beyond what ordinary incomes could support.

Limited investment vehicles – Low returns on bank deposits and immature stock and bond markets have made real estate China’s preferred store of wealth, leading to large investment allocation in housing.

High population density and urbanization – High population density and inflow of migrant workers have put upward pressure on cities’ land values and home prices, as developers and home purchasers compete for scarce land resources.

Strong income growth – High price levels today are more easily justified when one considers that average incomes in China are growing around 10 per cent per annum. Additionally, official income statistics may be underreported due to “grey income” outside the state’s supervision and control.

Figure 2: Home Price-Income Ratio by City TierSource: CEIC, CREIS
Tier 1 refers to Beijing, Shanghai, Guangzhou, and Shenzhen.
Tier 2 includes Tianjin, Hangzhou, Nanjing, Suzhou, Chengdu, Chongqing, Xi’an, Wuhan, Shenyang,
Qingdao, Zhengzhou, Hefei, Ningbo, Dalian, Wuxi, and Changsha.

Challenges ahead

While high population density and investor interest is likely to keep Chinese price-income ratios above those of most Western countries, residents and authorities both are wary of prices rising to greater extremes. For example: ample liquidity and loose housing policy led home price appreciation to outpace income growth in Tier 1 cities in 2015, with a similar trend in Tier 2 cities the following year, shown in the chart above.

Amid growing concern about housing affordability, the government stepped in to restrain the run-up in home prices by implementing new home purchase restrictions (HPRs) and higher down payment ratios on a city-by-city basis.

With HPRs and a tight mortgage policy expected to remain in the near term, the government may experiment with other policy initiatives to address lingering affordability concerns. In July, authorities launched a pilot programme to encourage cities’ development of rental apartments, primarily to serve the housing needs of migrant workers. Other possibilities include more subsidised social housing, mortgage guarantees for low-income earners, or implementation of an annual property tax to reduce speculation.

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