Going cool on cooling
The mainland's economic slump appears to be prompting a rethink at the top on need to curb home prices, despite a glut in smaller cities
A property glut in some smaller cities raises questions over how far the mainland's decade-long housing boom can last at a time when the fragile economy is more vulnerable than ever to a possible retreat in the red-hot property market.
A flurry of housing investment over the past several years, fuelled in part by herd-like speculative buying, resulted in some developers building more housing than could be sold once the market began to slow.
Now, the concern is that the market could be cooling too quickly, and risk stalling one of the few engines in the economy that are still firing.
While new home prices in Beijing rose 14.1 per cent last month from a year earlier and Shanghai prices gained 13.7 per cent, smaller cities are lagging the major centres.
National Bureau of Statistics data showed average new home prices in the top 70 cities up 7.5 per cent on the year.
"Dozens and dozens of small cities - still home to the majority of China's urban population - have more housing than they need," wrote Rosealea Yao, a principal analyst at GaveKal Dragonomics, a Beijing consultancy, in a report. "This excessive supply will put a serious drag on national construction growth for several years."
House prices have fallen for nearly two years in Wenzhou, a prosperous eastern city that had suffered fevered speculation before stringent controls on the property market took hold. In July prices in Wenzhou were down by an annual 2.4 per cent.
While Wenzhou's falling prices remain an exception, the city's plight and its move earlier this month to relax some of the toughest property market curbs are emblematic of the growing concerns about China's slackening economic growth and the risks of cracking down too hard on the housing market.
China's leadership, acutely aware of housing's importance to the economy, appears to have set aside concerns that a property boom was pricing millions of families out of the market.
"It was a clear signal that there won't be any new restrictions on home buying in order to temper price increases for a while," said Andy Rothman, chief China strategist at CLSA Asia Pacific Markets.
But leaving the market alone may not be enough. With stock markets volatile and caps on bank deposits, property remains the only game in town for millions of mainland savers.
Total property investment accounted for 14.8 per cent of gross domestic product in the first half of this year, up from 13.5 per cent a year earlier. Residential property accounts for 70 per cent of that total. And in a market where most flats and houses are paid for in cash, mortgage lending has been on the rise, with new mortgage loans reaching a record 963 billion yuan (HK$1.2 trillion) in the first half.
Wenzhou's two years of falling prices is the exception, but price rises in smaller cities are lagging the major centres. Average new home prices in 70 major cities rose 7.5 per cent in July, the statistics agency data showed.
Most economists believe incomes will keep growing enough to sustain relatively healthy demand for at least a year, and the government does plan to encourage urbanisation.
"We expect a stable property sector policy in the coming year and see a modest property recovery to continue," UBS chief China economist Tao Wang said.
Industry executives say there is now a tide of new investment coming to the top cities and provincial capitals, because demand remains strong. Over time, economists say, that could ease housing price inflation in the biggest cities.
They also argue Beijing may have no choice but to scale back its ambition to spur more development in lower-tier cities.
That, said Yao, could help China avoid what otherwise could be "a brutal construction crash".
The stakes for Beijing are high. A slowdown in exports and fixed investment means the economy is more reliant on the residential property market than it was even a year ago. In the second quarter, employment in the property sector rose by 8,000, while manufacturing lost 164,000 jobs.
Tax income from the property sector rose 45.7 per cent in the first half from a year earlier, while growth in the overall tax revenue slowed to 7.9 per cent.
Housing, moreover, props up at least 40 other sectors, from cement to steel to furniture and home appliances.