The author is ANZ greater China chief economist Liu Li-Gang
China’s property market witnessed a bumpy start in 2014 after a double-digit property prices surge last year. The new home sales in all tiers of Chinese cities dropped sharply in the past few months, and the unsold new home inventories have picked up significantly since the fourth quarter 2013 as well.
The second-hand housing market is also slowing. The Centaline second-hand home index, which is largely driven by housing prices, trended down on a year-on-year basis since the beginning of 2014 in first tier cities. Notably, Beijing’s second-hand home index has started to drop on a year-on-year basis since early 2013.
While all these indicators appear to have pointed to a slowdown in China’s property market, we do not think they foretell that China’s housing market is about to collapse.
In our view, China’s property market is experiencing a cyclical slowdown, which is normal and has occurred repeatedly in the past economic cycles. Unless China stops its urbanization process, China’s residential housing markets will still have significant room to grow over the next decade.
As China’s property market is heavily influenced by property curb, credit, and other macroeconomic policies, property prices are bound to be volatile as well. Based on the following factors, we believe that a collapse of China’s property prices is unlikely.
First, the policy to curb property demand remains effective in 39 cities. Thus, the existing market prices do not truly reflect the real demand conditions in those cities, including almost all first and second tier cities out of 70 cities where China’s National Bureau of Statistics releases the property prices regularly.
Indeed, some second tier or capital cities in the central or western provinces should not have imposed any control as their housing prices remain low and affordable. For those central and western cities, it could be a good time to phase out such an indiscriminatory policy that has lasted for more than two years.
Given the demand for housing in those 39 cities has been rationed, pent-up demand exists and will support the property market if the local governments are allowed to relax the curb progressively. A downward adjustment in prices, together with some relaxation of property curbs, will draw potential buyers into the market again in the coming months.
Certainly, the market dynamics would vary significantly from cities to cities. The housing prices will likely remain generally stable in the first tier cities and most of the second tier cities, where the unsold new house inventories are equivalent to 12 to 15 months of sales, due to weak sales in the first quarter.
However, if the sales rebound to the historical average, the current inventories could be de-stocking much faster. The de-stocking process in some third tier cites would be relatively painful, such as Wenzhou where inventories are equivalent to 42.5 months of sales, Maoming where the number is 32.5 months, and Dandong with 32 months of inventories.
Second, it is worth noting that China’s residential property market is very cyclical. China’s property price in the past decade has two clear and complete cycles: from 2007 to mid-2009 and from mid-2009 to mid-2012, and an ongoing cycle starting from mid-2012.
The current cycle peaked by the end of last year, and the price has started to move downward. In our view, there is no need to become overly worried. Like stock prices, price correction after a sharp price increase is inevitable and necessary.
The recent slowdown of the property investment is coinciding with the slowing trend of the overall fixed asset investment. This reflects the government’s intention to re-balance the economy.
From this perspective, the slowdown of the housing investment is not particularly caused by the lack of confidence, and it is quite different from what we saw during the global financial crisis when the demand for housing crashed suddenly. As investment falls, the future supply of properties will also decline, thus supporting the prices.
Third, China’s housing supply reacts to the demand conditions quickly. With the sales slowing down, the newly started floor space fell sharply in the first quarter 2014. The developers also slowed the pace of land purchases, holding very low land reserves.
All these reinforce our view that China’s property market is used to cyclical adjustment. The developers often adjust their supply proactively.