China’s property prices are increasing sharply. Analysts attribute this trend to the rapid rise of urbanisation, excessive liquidity and dependency on the housing market for investment. According to Mirae Asset Global Investments, the country’s urbanisation rate has risen from 39.8% to 60.6% in the past 15 years. The index that tracks China’s nominal residential property prices has surged 40% in the past decade, a recent Mirae Asset study added.
However, worries about the cooling of the property sector are getting real in China as price hikes have been constrained by government actions. Amid rising debt defaults by property developers, the Chinese government has taken measures to curb their borrowing ability to upkeep the financial system stability.
Beijing’s ‘three red lines’ policy in the real estate industry was introduced last year that forced many developers to deleverage. This is due to the fact that many real estate companies rely heavily on borrowing for property development. According to Fitch Ratings, there was a sharp 20% fall in nationwide residential properties sales in China in August 2021, year-on-year (YoY). China’s property inventory levels are also far below previous peaks.
The Chinese government is also attempting to strengthen risk controls like mortgage approvals and borrowing rates, in order to instil greater discipline among investors, and companies.
In the latest move, China has decided to introduce a pilot property tax scheme targeting residential properties in urban areas. This was to rein in soaring housing prices and enhance housing affordability, as a part of a wider ‘common prosperity’ programme. This development, has, however, alarmed wealthy Chinese in cities as they make significant amounts of extra money by renting out properties. As per analysts, this may hurt developers who have debt issues or cash-flow problems in the short term but will have little impact on larger, well-positioned firms.
Besides the whole Evergrande Saga, worsening Covid-19 conditions, the overall impact of property restriction policies by the Chinese government coupled with negative sentiments of buyers have also contributed to the current slowdown. According to Fitch Ratings, in the near term, widening the property tax scheme could weaken homebuyer sentiment, as buyers anticipate its eventual rollout nationally. This would aggravate pressures associated with developers’ credit strains that have already hurt residential housing sales.
In recent months, potential buyers have stayed away from buying properties, on the back of Beijing’s crackdown on fresh borrowings. Data released by the National Bureau of Statistics (NBS) showed that the average new home price in 70 major Chinese cities was unchanged in September, as compared to a mere 0.2% growth in August. This was the first monthly decline reported since 2015. In addition to that, China’s new home prices grew 3.8% in September on a yearly basis, the slowest recorded in nine months. This was in comparison to a 4.2% increase in August.
According to real estate data collector China Real Estate Information Corp. (CRIC), China’s top 100 real estate developers reported a combined sales of $118 bn in September, which was down 36.2% year on year, compared with a 20.7% slide in August. This is unusual as September and October usually bring in robust property sales in China.
Is China’s real estate affecting the economy?
The regulatory interventions in the property sector have also contributed to China’s economic slowdown in recent months. China property market has much significance and has quite a big economic footprint.
“Real estate contributes an estimated 24% of GDP in China, including indirect impact via industries such as steel, compared to 15% in the US, with close to two-thirds from the residential sector,” said Louis Kuijs, head of Asia Economics from Oxford Economics. He added that the property market slowdown is expected to affect China’s economy significantly.
China’s property sector, which has major backward linkages to industries such as steel, employs approximately 4 million across different industries and is a key source of revenue for many local governments. China also accounts for 50% of overall Asia’s High Yield bond market, with the country’s real estate sector making up a big chunk of it. China’s property market accounted for about 27.3% of the country’s fixed-asset investment in 2020.
Unlike developed nations, in China, households tend to invest in the real estate market, leading to high property ownership rates, instead of buying investment products.
Mirae Asset statistics showed that as of 2019, 60% of households’ investable assets in mainland China were allocated in the property market and 24% as cash and deposits, compared to 24% of the property and 15% of cash and deposits in the US. While for equity investment, mainland Chinese households allocated only 8% of their investable assets, compared with 25% in the US market, it added.
Challenging times ahead
Fitch Ratings expects 2021 residential properties sales to remain largely flat to 2020 even if the decrease in monthly sales persists for the rest of this year.
Kuijs from Oxford Economics believes that the housing scenario is a contained short-term downturn combined with a gradual, managed long-term retrenchment. In terms of long-term forecast, he added that China’s government will manage to gradually reduce real estate’s footprint – both the direct part and the indirect part via the industries that cater to construction. Besides this, urbanisation will also continue to drive fundamental demand for housing in the coming decade, he added.
According to Pearly Yap, a Lead Portfolio Manager for Eastspring Investments, the slowdown in China’s property sector would not be as prolonged. Furthermore, the spillover effect will likely be smaller, as excess capacity in industrial sectors such as coal and steel has come down significantly since 2015. In addition to that, anti-speculation measures have also kept a lid on property prices.
For the longer term, Wai Mei Leong Portfolio Manager, Fixed Income at Eastspring said that “China’s growing middle class, urbanisation and the development of China’s megacities are likely to continue to support the revenues of the property sector.”