The Chinese real estate market is lurching wildly toward a property bubble despite its government’s attempts to implement cooling measures. The country’s biggest cities face the most danger as prices careen out of control. The China Real Estate Index System of 100 Chinese cities showed in October that prices were in their 17th consecutive month of increases while even local governments attempt to adopt stricter lending provisions to slow the growth. Runaway development is creating ghost towns in some areas while in others prices have gotten so high that some banks are refusing to lend. For more on this continue reading the following article from Global Property Guide.
China’s housing market has continued to boom alarmingly in the recent months, despite government efforts to cool prices.
“China’s facing an increasing risk of a property bubble,” according to Australia & New Zealand Banking Group Ltd. (ANZ) economist Liu Li-Gang. Li-Gang pointed that house prices were a bit out of control, especially in China’s big cities.
House prices of the 100 Chinese cities surveyed rose again in October 2013, the 17th consecutive monthly rise, by 1.24% to an average of CNY 10,685 (US$ 1,742) per square metre (sq. m.), based on figures released by China Real Estate Index System (CREIS). This was an increase of 10.7% as compared to the same period of the previous year. Out of the 100 cities, 93 had y-o-y house price hikes.
China’s top 10 cities (which include Beijing and Shanghai) also rose by almost 2% from the previous month and were up by 15.7% during the year to October 2013.
In October 2013, Shanghai’s second-hand house price index rose by 11.6% y-o-y (8.1% in real terms) as compared to the 0.2% decline in October 2012, according to the Ehomeday data. Beijing has also been experiencing huge price hikes this year, as prices of second-hand residential buildings rose by around 14.7% (11.8% in real terms), during the year to July 2013. It had a monthly average growth rate of 5.14% from January to July 2013, based on the figures from National Bureau of Statistics of China (NBSC).
Property prices in China rose rapidly from 2000 to 2008, fuelled by low interest rates and cheap credit. The price index for second-hand homes in Shanghai soared 121% (85% inflation-adjusted) from Q1 2003 to Q2 2008, based on data published by Ehomeday.
In March 2013 new policies were introduced by the State Council aiming to control skyrocketing house price increases :
- Every first quarter of the year, major cities should publish an annual housing price control target.
- Cities with overheating housing markets are to raise their commodity housing and land supply, while cities with declining prices should keep prices stable by stimulating housing demand.
- In cities where price hikes exceed their price control targets, local People’s Bank of China (PBOC) branches will increase down payment requirements.
- Tighter mortgage restrictions on second home purchases will be implemented in banks. Buyers without a local registration are barred from buying more than one property.
- Banks should not give loans to developers that hoard land and participate in price-inflating activities.
- Local governments must boost low-income housing production.
- The government will continue to reform property taxes, to include an extension of the trial holding tax from Shanghai and Chongqing to other cities, and a transaction tax.
Some local governments have implemented even stricter lending conditions, while some banks slowed or even stopped their mortgage lending,
Sales of residential buildings rose by 32.6% in the first 10 months of 2013, according to NBSC. In Shanghai, sales volume of new homes sharply increased by around 26% y-o-y to Q3 2013, according to Colliers International. But residential sales in Beijing were up by only 3.2% in the first 10 months, according to the Beijing Municipal Bureau of Statistics,
The construction boom has led to the rise of uninhabited or so-called ghost towns, according to China economist Patrick Chovanec. He also pointed out in a CNBC interview published in March 2013 that the ratio of residential floor space under construction to floor space sold has been rising. In 2008, for every one sq. m. of space sold, 3.9 sq. m. was under construction. The ratio rose to a record high of around 4.4 sq. m. in 2012.
During the year to Q3 2013, China’s economy expanded by 7.8%, a rise from 7.5% y-o-y growth in the second quarter. GDP growth by the end of 2013 is expected to be slightly lower at 7.6%, a decline from 9.3% expansion in 2011 and 10.4% in 2010, and China is expected to post an even lower growth rate of 7.25% in 2014 as policy makers “refrain from stimulating activity amid concerns for financial stability and the need to support a more balanced and sustainable growth path,” according to the IMF.
Stabilization in Beijing; tightening measures upgraded
Residential sales in the Beijing area rose by 3.2% to around 10.46 million sq. m. during the past 10 months, according to the Beijing Municipal Bureau of Statistics. Residential investment rose by 7.2% during the same period, while the residential construction area was down by 0.9%. Jones Lang LaSalle also saw a rise in Beijing’s high-end residential capital values by an average of 1.6% q-o-q in Q3 2013.
Sales of high-end luxury apartments and villas continued to rise, albeit more slowly. According to Colliers International, the villas sector had an aggregated sales rate of 89.9% while the luxury apartment sector had a rate of 93.3%.
Due to the tightening measures of early 2013, the growth rate of home prices in Beijing has fallen and there are signs of stabilization.
In October 2013, Beijing introduced a scheme to house the middle-income that will cost more than public housing, but 30% less than normal residential dwellings. Around 70,000 homes for middle-income families will be introduced from 2013-2014, according to Beijing Municipal Commission of Housing and Urban-Rural Development.
There has been talk that proven speculators might be deprived of their dwellings and be prohibited from buying a property in Beijing in the next 5 years. The city government will also bar developers who would not accept the Beijing housing authority’s “guidance” on prices.
Housing market in Shanghai still very bubbly
In October, house prices rebounded, increasing by 1.3% (1.2% in real terms), according to data from ehomeday, Shanghai’s largest housing information portal.
New home sales volumes in Shanghai rose by around 26% to 3.10 million sq. m., during the year to Q3 2013, according to Colliers International. The average sales price rose by 5% y-o-y to CNY 24,258 (US$ 3,955) in Q3 2013, also up by 2% from the previous quarter. The increase in prices for low- and mid-end homes has mainly contributed to the quarterly price increase.
Recently, Shanghai has introduced stricter policies to curb house prices. In November 2013, the municipal government increased the minimum down payments for second home purchases from 60% to 70%. Non-Shanghai residents will also face tighter qualifications to be able to purchase homes in Shanghai.
Previous pump-priming measures
Housing sales and property prices began to rise across China in H1 2009, boosted by November 2008's CNY4 trillion (US$585 billion) post-financial crisis stimulus package. Buyers took advantage of looser lending conditions and lower interest rates. Developers were able to easily get loans with the lowered capital requirements.
The package reduced the property deed tax rate for first-time buyers of small apartments to 1% from 1.5% (January 2009 to December 2009), introduced stamp duty and land value-added tax exemptions, and exempted sellers of residential property from the 5.5% business tax, if sold after more than two years.
Mortgage lending rises
Mortgage lending soared this year despite the government’s continuous implementation of tightening measures. As of September 2013, new home loans in China reached a total of US$ 2.31 trillion in new home loans, according to the People’s Bank of China (PBOC). China’s outstanding mortgage loans rose by 20.8% to CNY 8.3 trillion (US$ 1.35 trillion) during the year to Q2 2013, according to the PBOC.
One cause might be the relatively steady key interest rate, at 6%. In June 2012, the central bank cut interest rates by 25 basis points, a first since the global financial crisis in 2008-2009, to 6.31% from its 6.56% peak. Another rate cut was made in July, with the rate falling down to 6%, and hasn’t been changed since then.
Nevertheless, mortgage market lending growth has been on a declining trend since its peak of 59.7% in 2009. The decline started in 2010, also the time when the government started imposing property curbs. China’s mortgage market remains small, however, with home mortgage loans at around 14.5% of GDP in 2012.
In February 2012, China’s National Development and Reform Commission (NDRC) stated that the agency would not approve medium- and long term loans to banks if those loans are to be used to finance foreign buyers’ mortgages.
Other factors hindering mortgage market growth include:
- Mortgage lending dominated by state-owned commercial banks.
- Banks prefer to offer loans for new housing. The mortgage market for old housing is undeveloped.
- A mismatch between property registration and mortgage policies.
- Banks lean on real estate developers when buyers default on loans.
As property prices surged since early this year, local cities and banks became even stricter in releasing mortgage loans. Based on a survey made by Z-Park Association for Internet Finance and the Rong 360 Research Institute, banks in 17 out of 32 key cities in China slowed or stopped mortgage lending. The survey consists of 500 banks from 32 cities, and conducted from October 11 to November 11, 2013.
The mortgage market is led by four major state-owned commercial banks namely: Bank of China, China Agriculture Bank, China Construction Bank and Industrial and Commercial Bank of China.
Lending measures are getting stricter
The People’s Bank of China’s (PBOC) key interest rate has remained steady at around 6% since July 2012.
Despite this, the weighted average interest rate of home mortgage loans slightly rose to 6.29%. There are reports that some local Chinese cities are currently implementing measures to tighten housing loans. In March 2013, the government stated that regional branches of PBOC will implement measures such as higher interest rates and down payments, and stricter sales tax enforcement, especially in cities with skyrocketing price gains.
In the cities of Beijing, Shanghai, Qingdao, Hangzhou, and Guangzhou, buyers are now having difficulties getting Housing Provident Fund (HPF) loans. The HPF encourages workers to save a portion of their income to buy residential properties. Similar to Singapore’s scheme, when an employee registers with the HPF, the employer opens a bank account under the name of the employee. The employee contributes 5% of his monthly salary and the employer deposits the same amount. Employees can’t withdraw unless they retire, pass away, or leave, but can use the funds to purchase residential properties at below market rate loans from state-owned banks.
Government employees and employees of state-owned enterprises must take part in the system, while private sector employees have the option. The amount of workers registered in the program rose from an estimate of 80 million workers in 2004 to around 100 million workers in 2007.
Rising rental prices
Rental prices have been rising in China since 2010. Rents rose by around 4.5% across China during the year to October 2013, based on the figures from National Bureau of Statistics (NBS).
Beijing topped the list with rents rising 6.2% y-o-y in June 2013, according to eChinacities.com. They have been rising for 52 months.
Shanghai came in second with rental prices increasing for 37 consecutively. Rents rose by 2.05% for one bedroom apartments, 1.13% and 1.08% for two- and three-bedroom homes, respectively.
During the second half of 2013, the Ministry of Housing and Urban-Rural Development as well as the State Administration for Industry and Commerce issued an announcement requiring local regulators to standardize the services of real estate agents in order to deal with the house price and rent hikes and to prevent apartment hoarding.
The rental market in China is heavily regulated, and the system favours the landlord. The landlord may get large payments for breaches of contract committed by the tenant. Although major cities have no rent controls, other smaller cities may have.
In February 2011, rental yields in some major Chinese cities were between 1.9% and 4%, according to Global Property Guide research. Chengdu was an exception, having healthy yields ranging from 5.2% to 7.5%, with higher yields on larger apartments. Guangzhou and Shenzhen have lower average yields of 3.17% and 2.88%, respectively.
In Shanghai, average ordinary apartment yields were 2.92% while luxurious apartments had average yields of 2.63%. The lowest average yield was in Beijing, at 2.22%.
Economy to decelerate in 2014
In Q3 2013, China had its fastest pace of economic growth for this year with GDP up by 7.8% from a year earlier. China’s Q3 growth was driven by investment, mainly in fixed assets, which had a 20.2% y-o-y increase. The growth also “reflected the effect of the pro-growth measures taken by the central government since July," according to chief economist for China at HSBC Holdings Plc., Qu Hongbin.
In 2014, the IMF predicts that the economy will decelerate further to 7.3% in 2014. The World Bank also cut China’s growth forecast by 0.3 percentage points to 7.7% in 2014, citing that the government should contain the country’s rapid credit growth.
From an average growth rate of 12.7% annually from 2005 to 2007, China has experienced a mild slowdown in recent years, with an average annual real GDP growth rate of 9.6% from 2008 to 2011. Despite the slowdown in 2011, China overtook Japan as the world’s second largest economy, after the United States.
A set of stimulus measures were introduced by the State Council during the second half of the year:
- Businesses with monthly sales of less than CNY 20,000 (US$ 3,250) will have their operating and value-added taxes temporarily scrapped. The measure took effect last August.
- Administrative costs of exporting will be reduced and approval procedures will be simplified. This measure includes the temporary cancelation of inspection fees for commodities exports.
- In order to carry out China’s railway development plans, the council will create more financing channels, encouraging private investors to participate.
Aside from these set of stimulus measures, China also unveiled a 60-point reform plan in November 2013, which includes policies that paves way for China’s transition to a consumption-driven growth from being an investment-led economy.
The plan also includes reforms that could boost China’s urban population in the near future. The most prominent was the easing of the one-child policy, which now allows couples to have two children if one of the parents is an only child.
China’s annual consumer inflation slowed to 3% in November 2013, from 3.2% in October, based on the figures of the National Bureau of Statistics of China. Urban unemployment also eased, although slightly, from 4.1% in June to 4.04% in September 2013. According to Ministry of Human Resources and Social Security (MOHRSS) spokesman Yin Chengji, around 10.66 million jobs were created for the first nine months of 2013.
This article was republished with permission from Global Property Guide.