Crying wolf about China’s housing market

July 2, 2013 / By  

Over the past few months, I’ve been greeted each morning with alarming headlines about China’s residential market – “Property Values are Skyrocketing, with No End in Sight,” “China’s Cooling Measures Not Working,” “Property Gains Defy Government Plans,” etc. I understand that news reporters are incentivised to attract and hold a reader’s attention, but these reports have struck me as particularly sensationalistic and I worry that they may be distorting many people’s opinions of this market.

To be fair, hyperbolic headlines are nothing new when it comes to China real estate. Several questionably accurate stories about ghost cities have recently ruffled feathers among our clients in China. The sheer scale of development in this industry and its importance to the overall economy often make it an easy target for China sceptics. I think that what these sceptics need to bear in mind (no pun intended) is that home prices rising does not necessarily signal the inflation of a bubble.

Over the past few years, regulators in China have intervened in the market to limit price growth. At the same time they have utilised purchase restrictions and mortgage policy to encourage participation by first-time homebuyers and discourage investors from buying apartments. It would now appear that regulars must balance between too much price growth, which risks allowing a speculative bubble and keeps housing out of reach for middle class buyers, and slowing down the market too much, which would harm the overall economy and risk social instability should property values begin to fall.

With this in mind, it seems to me that the current market is on the right track. For the full-year 2012, average residential prices remained essentially flat across China’s cities. Meanwhile, urban disposable income grew by more than 12%. This means that average incomes made a lot of progress catching up with housing prices, i.e. housing became more affordable. Even in May when overall prices saw their strongest growth of the year, prices only rose about 6% from a year earlier. Understanding that the government’s priorities are to keep price growth at a reasonable level and not dampen the economy or allow prices to fall, it seems that the product of government intervention of slow single-digit growth has been almost ideal.

Short term volatility in price in a certain city, such as Beijing of late, can seem alarming, but does not necessarily signify a bubble for the entire country. The government’s “new five measures” have been implemented with varying intensity at the local level, primarily due to the government’s awareness that cooling the property market too quickly could have dire consequences for local economies. In addition, a number of factors such as local sentiment and the appearance of a “hot market”, not to mention media coverage, can all affect the way a certain city’s property prices behave.

While the government’s management of a highly complex and sensitive housing market has so far been effective, long term structural problems still remain, including providing housing options for lower income earners and allowing investment in alternative assets to residential property.

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