China’s housing market battled through a tense 2015 as the supply glut intensified. The government responded with a stimulus package. Looser credit and supportive demand measures are breathing life into China's property market once more. But can it be sustained?
In the first four months of 2016, housing sales rose by almost 40%. Residential building construction starts expanded 18% year-on-year in the same period to around 300 million square metres. Real estate investment also accelerated, growing 6.7% year-on-year in April, up from 5.6% in March. Good news for the housing market, but is it sustainable? Here we discuss five essential points about China's housing market revival:
Firstly, it is now a two-speed market
The tier-1 market, made up of the major coastal cities such as Beijing and Shanghai, is performing much better than the non-tier-1 markets. Inventory levels in tier-2 cities and below remain much higher than the tier-1 market. Stimulus measures such as the reduction in mortgage down payments and offering unsold properties as social housing are aimed at reducing inventory in lower-tier cities. However, policymakers are tightening measures in the over-heated tier-1 market as highresidential sales could create another bubble and increase the credit burden for middle-class consumers.
Second, it's the non-tier-1 market that matters
The tier-1 markets cover only 4 prefecture cities – Beijing, Shanghai, Guangzhou and Shenzhen - which account for around 3% of total population, and 9% of urban population. Little attention is given to lower-tier cities in the rest of China although they account for 95% of China's urban housing sales. Tier 1 cities are constrained by limited land supply, while lower tier cities are concerned about high inventory levels. Hence, the key concern is whether there would be sufficient improvement in sales to address the excess property supply in the lower-tier cities.
Thirdly, houses need to become homes
Looking at inventory from an important contextual perspective: people need to have sufficient money to buy the houses. Based on our proprietary forecast of household income and house prices, we believe the household balance sheet is still robust enough to support sales in the short term without taking on excessive debt. Tier-1 households would take about 16 years to repay mortgages, while households in tier-2 and the rest of China can repay within 10-12 years.
Fourth, destocking will take time
China's residential property destocking will speed up in the short-term, resulting in higher completions through to 2019 but lower investment over the long-term. The impact of the stimulus package will not last forever and destocking will take time. Inventory levels seen around 2010 can be considered ‘normal’ and we believe this process will take four years, especially in non-tier-1 market.
Finally, stimulus has a shelf-life
As we expect property sales to decline from 2017 to 2019, housing starts will need to fall further to for destocking to take place. Hence given the 12 to 18 months construction cycle, housing completions will be negative for the coming three years before returning to positive growth.
The long-term picture is one of correction following the rapid acceleration in construction since 2010. When the correction is over, China’s urban housing market will return to a long-term path determined by per capita living space growth and replacement demand.
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