China’s National Bureau of Statistics (NBS) released its monthly report on home sale prices (LINK). The segregation of “15 Hot Cities” in the NBS report implies that they will be the primary focus of government policy:
Intense market restrictions kept prices flat for many months in these key markets until a slight uptick last month in some of the Tier 2 markets (Zhengzhou, Jinan, Chengdu, and Wuhan).
Segregating the 10 strongest and weakest of the 70 markets covered by NBS data shows that most of the cities with weakest prices were the largest and formerly hottest markets, particularly in the Yangtze River Delta area. Those cities have strong economies, growing populations, and cultural appeal that should sustain long-term housing demand. The cities with the strongest recent prices include former laggards in regions with weaker economies and stagnant population, but gentler application of housing market policies.
Strength in Dandong is explained by that city’s role as a key conduit for trade with North Korea that may benefit from an easing of sanctions. Strength in Haikou and Sanya is explained by promotion of a new free trade zone.
NBS data in major markets show that rapid price increases are no longer a problem. However price appreciation was tamed using policies (e.g. high downpayment requirements and increased mortgage rates) that made housing less affordable for ordinary people. At the same time strict regulations of presale prices made speculation more attractive for wealthy investors because risk is reduced when you are able to buy at artificially low levels. Price restrictions have created a sense of scarcity that leads to hoarding of supply by developers and urgency among buyers (see SCMP: A Chinese homebuyer’s ordeal to secure a home that she didn’t like). Several policy initiatives may address these problems:
- Minimum holding periods have been imposed in over 50 cities. These will be a bigger deterrent to speculators than occupiers.
- Likely introduction of property tax will discourage accumulation of idle property investments.
- Increased land supply should balance long-term demand in the “hot” cities where strong economies are attracting migrants. Land space acquired for real estate development rose 15.8% in 2017 while residential floor space sold rose 5.3%. In addition to auction sales, densely populated top tier markets are trying to accelerate redevelopment efforts.
- Rental markets will be supported with policies that may include favorable access to land, tax relief, and encouragement of professional property ownership and management of rental housing. These measures may create opportunities for development of businesses resembling US apartment REITs (See: MOHURD announcement)
Relatively strong economic growth (GDP +6.7% yoy in 2Q18) affords China the opportunity to reform its housing markets without excessive concern about possible adverse impacts on GDP or financial stability. If growth were to weaken over the next year, perhaps in connection with trade tensions, then relaxation of housing market restrictions would become more likely. An April cut in banks’ Reserve Requirement Ratio was widely seen as a signal that monetary policy could become more supportive.