Should we be concerned about China's property market?

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September 10th, 2014

The real estate sector undeniably plays an extremely important role in the Chinese economy: with a 15% share of GDP it also has extensive and far-reaching connections with a large number of other industries such as steel and cement. It is therefore logical that this sector's loss of steam over the last few months should be monitored so closely, in terms of its causes and consequences. But it is not reasonable to set the alarm bells ringing because an alleged property bubble is inevitably going to burst in the near future.

After a period of energetic growth in 2013, both prices and the volumes of house purchases started to slow down their progress early in 2014, even recording slight decreases in recent months (see the graph). While 65 of the 70 cities studied by China's official statistics office stated that prices were still rising at the end of the last year, by March this number had fallen to 56 and in July there were only two. According to the property website Soufun, the national price for new housing began falling in May 2014. It is easy to spot the reason for this behaviour: the restrictive measures applied in the second half of 2013 by the economic authorities in the areas of credit (which have ended up affecting the mortgages being granted) and administration (licences, etc.). Two considerations justified this policy. Firstly, the realisation that some counterproductive imbalances were building up, in particular the oversupply of homes in some cities. Secondly, the strategic aim of a slow but inexorable shift towards a new economic model with less emphasis on investment (including residential).

The Chinese authorities are hoping to balance the property sector's development and they have a wide range of tools, some of them very powerful, at their disposal; certainly more tools than those normally available to market economies. The long-term efficiency of such actions has yet to be seen but, in the short term, it seems clear that they can help to prevent any sharp readjustment. In fact, there are already signs of this: the government recently decided to discretionally relax purchase conditions in some cities. These are fine-tuning policies, so called because they discriminate between cities or regions depending on their different characteristics and requirements. It is also notable that China's central bank has made 48 billion dollars available to refinance real estate projects through the China Development Bank. Such kinds of measures should help to contain the sector's slowdown. We also believe that the systemic risks resulting from the housing market can be handled. One element supporting this opinion is the fact that exposure to real estate credit is relatively low, both for households (according to the most recent data, mortgages account for 18% of GDP compared with 59% in Spain) and for banks (23% of all bank loans are related to the property sector compared with 54% in Spain). However, it is true that, in this current phase of a slowdown in growth, any sharp correction in the sector would increase doubts regarding the country's ability to avoid a hard landing.1 And that might jeopardise the renewed reforming drive demonstrated by the new government's most recent actions (in the financial sphere, in particular).

In the long run, there are three factors that foreshadow a healthy future for the real estate sector. Firstly, the fact that urbanisation is continuing. In order to transform its economic model, the country needs more people to move from rural areas (where 45% of its population still lives) to its urban areas. Specifically, in the next 20 years 300 million people are expected to move into Chinese towns and cities; i.e. 15 million every year, the same as building a city the size of New York every six months. Secondly, the rise in the per capita income of citizens, which should improve access to higher quality housing and added value. And lastly, state support for the sector by building homes for low-income families.

1. According to recent studies, a sharp correction in the real estate sector might reduce China's growth by between 0.96 and 1.92 p. p., (see «China's property sector overinvestment», Nomura, 5 May 2014), in line with our estimate of 1.75 p. p. (stated in «Is There a Property Bubble in China?», "la Caixa" Research, Working Paper Series 04/12, July 2012).