China’s property boom won’t be over any time soon
Thomas Deng says soaring prices are mainly confined to the major cities, while housing in the rest of the country remains affordable. People should ignore the dire warnings and get ready for prices to rise further
Property prices in China have roared to life this year. As of September 30, prices in 70 cities were up by an average of 9.3 per cent year on year, and those in tier-one cities have soared 31.9 per cent year on year.
Chinese property has become a colossal asset class, aggregating more than US$20 trillion in market value (as of 2014), based on government estimates. Meanwhile, residential property currently accounts for 60 per cent of total households’ balance sheets, among the highest worldwide; the optimal level, from a global perspective, is around 25 per cent.
So the question on everyone’s mind is not if, but when, this bubble will finally burst. The short answer: not any time soon.
China’s property market is a tale of two cities – specifically, higher-tier and lower-tier cities. Following the recent price rally, China’s tier-one cities have become increasingly unaffordable; the prices-to-household-disposable-income ratio in tier-one cities was 14.7 at the end of 2015; it’s now around 18-20. Housing affordability in China’s tier-one cities is comparable to Hong Kong’s. Absolute property prices, however, do not look excessively expensive relative to those in global cities like New York and London.
In lower-tier Chinese cities, affordability is less of a concern. The price-to-income ratio was 8 for tier-two cities at the end of last year and, even after this year’s surge, around 9 on average, excluding Xiamen (廈門) and Hangzhou ( 杭州 ). The ratio nationwide reached 7.2 at the end of 2015, the lowest in the past 17 years. So, as China’s tier-one and certain tier-two property markets boom, housing in the majority of the country remains affordable.
So what does this mean? Quite simply that cities like Shanghai and Shenzhen are overheating, but most others across China are not. This is significant because it will determine the extent of further government tightening measures on a national level. Local governments started to roll out restrictive measures in March to pre-empt potential systemic risk from morphing into both the real economy and the financial system. The central government is likely to continue relying on local authorities to cool their respective property markets.
These measures should eventually contain prices from spiralling out of hand. But until a boiling point is reached, local governments have an incentive to allow the free market to work its way through the system. Housing activities benefit construction, upstream materials suppliers and downstream real estate services. And the wealth effect on consumption is also helpful.
Demand for property will continue to be buttressed by first-time buyers and homeowners looking to upgrade amid rising incomes. Additionally, the forces currently inflating prices will not disappear any time soon. These include strong money supply (M2) growth, and all-time-low benchmark lending rates and mortgage rates.
With investors and first-time homeowners increasingly entering the market, it’s reasonable to be nervous about rising household debt. But property-related leverage is well contained in China: household mortgage ratios and effective loan-to-value ratios are low on a global basis.
So, any “bubble risk” is likely to be effectively managed by local governments; neither rising prices nor housing leverage warrant the dire calls of impending systemic collapse. In fact, since prices still have room to rise even further, investing into tier-one property markets would be a wise decision for those with an abundance of liquidity.
Thomas Deng is regional CIO for Greater China and chief China strategist at UBS Wealth Management