China’s booming property market seen cooling off in coming months
Despite a strong start to the year, demand is expected to slow amid a lack of strong stimulus and regulatory tightening in some cities
The recovery in China’s housing market may be fragile, with the current cyclical rally likely to end by the second or third quarter of this year as prospects diminish for further strong stimulus and selective regulatory tightening drags on demand, analysts say.
The property market had a strong start to the year, with robust demand driving home sales on the back of a rapid expansion in credit, but the recovery may not be sustainable, said Barclays’ analysts.
“The current housing market cycle, which has already run for 39 months, could end by Q2 or Q3 of 2016, implying that the recent housing market rally and strong home sales will reverse course in the coming months,” they said in a report.
The previous two mainland China housing market cycles experienced since 2006 suggest an average duration of 41 months, they added.
Since the start of 2016, China’s housing market has been buoyant, as total property sales soared 36.5 per cent year on year over the first four months of the year, sharply higher than the 6.5 per cent gain in the same period of last year, the National Bureau of Statistics reported.
In particular, residential property sales were robust, up 38.8 per cent year on year. Growth in total floor space also accelerated to 21.4 per cent, versus a 14 per cent contraction for 2015 as a whole.
As a result, developers are increasing their spending, with real estate investment jumping 7.2 per cent in the January-to-April period, compared with a 1 per cent increase for all of 2015.
Barclays analysts said the booming property market has supported the recent stabilisation in China’s economic growth on the back of a rapid credit expansion. However, looking ahead, they expect the housing market to cool off in the coming months.
“Our estimates suggest that even with the robust home sales year to date, the oversupply in China’s housing market will continue to be a drag on new investment,” they said.
Besides the excess supply in lower-tier cities, housing demand is also constrained by “demographic shift and more restrictive policies”, Barclays said.
The tightening of property market restrictions by mainland authorities has already led to lower speculative demand in first-tier cities. In April, home sales growth in Shanghai and Shenzhen both declined sharply by 22 per cent and 30 per cent respectively, after local governments toughened home purchase policies for non-residents.
More importantly, Barclays said a demographic shift will put a lid on housing demand, as there are fewer people in the marriage age bracket, defined as 20-39 year olds who have the highest marriage rate, according to China’s 5th population census.
Unlike in some Western countries such as the US, in China home buying usually takes place before marriage and is almost a prerequisite. Many women won’t marry a man if he doesn’t own a home.
The demographic shift is “a major source of inelastic demand for housing”, Barclays analysts said.
Separately, analysts from Moody’s Investors Service also forecast that China’s housing market will slow down in the coming 12 months.
Growth in nationwide home sales could moderate to a single-digit percentage for the 12 months
ending May 2017, sharply lower than the 16.6 per cent gain in 2015 and a 32 per cent rally seen in the 12 months ended April 2016, Moody’s analysts predicted.
The boom in home sales for the past few months is mainly driven by strong stimulus measures. However, Moody’s expect “limited benefits” from any further stimulus measures, while selective regulatory tightening in higher-tier cities could also lead to lower property demand in those markets.
Robust price growth in cities like Shenzhen, Shanghai, Nanjing and Wuhan has already triggered regulatory tightening in their residential property markets in March.
“Such measures will reduce the demand in property investments, and could help moderate the property price growth in these cities,” Moody’s analysts said.
Nevertheless, they said the central government will be careful in applying those tightening measures and would mainly target cities with strong price growth.
“We expect policies will remain supportive in lower-tier cities, where property prices remain sluggish,” they said.