Tightening measures take effect as China’s home price gains cool in October

China’s average new home price growth rate slowed significantly in October after 22 cities rolled out a raft of cooling measures, according to a private index released on Friday.

Growth in average new home prices in 100 cities monitored by China Index Academy slowed to 1.65 per cent month on month in October, compared with the 2.83 per cent gain in September.

Cities that previously saw a frenetic surge in home prices experienced a larger fall in their growth rate. Zhengzhou, in central Henan province, saw the steepest fall from 6.92 per cent growth in September to 1.55 per cent in October. Wuxi in Jiangsu province saw its price gain growth rate fall from 6.82 per cent to 1.94 per cent.

Of the 16 cities that had imposed tightening policies and were monitored by the academy, 14 saw a cooling in price gains. Price advances in Beijing fell to 1.26 per cent from 3.88 per cent, while in Shanghai they cooled to 1.09 per cent from 3.54 per cent.

Prices of pre-existing homes, which are more sensitive to market change, also saw major corrections. Price gains in Beijing slowed by 1.79 percentage points to 0.97 per cent, while in Shanghai they slowed to 0.59 per cent.

The number of housing transactions also fell with the cooling price growth. Of the 22 cities that introduced curbs, 13 saw a month-on-month fall in the number of sales in October, according to Centaline Property Group. Combined sales in 54 cities tracked by the agency in the first week of November fell by a further 20 per cent.

Ouyang Jie, vice president of Shanghai-based developer Future Land Holdings, said that in the next few months new home sales volume will contract while prices “superficially drop”, a result of the government intervention. Many cities had refused to grant pre-sale permits to developers if they believed the prices submitted by developers were too high. This would artificially drag down prices, he added.

The tightening measures won’t be relaxed for another 18 months, Jie predicted.

However, a Harvard University working paper recently published by the US National Bureau of Economic Research says the demand for real estate in China is so strong that current sky-high prices might be “sustainable”, especially given the sparse alternative investments for Chinese households, so long as the level of new supply is radically curtailed.

“In many respects, China looks like a classic housing bubble. Prices have soared. New construction is enormous. Vacancies are large and pervasive. It is tempting to view these events from afar and conclude that a price drop is imminent,” said Harvard scholar Edward Glaeser, who led a team of four scholars on the paper. “As we try to demonstrate, this scenario is far from certain.”

Part of the scholars’ optimism lies in the fact that leveraged property developers are cozy with state banks and are therefore likely to have loans restructured even if under pressure, they said.

If income growth is robust and housing supply growth is effectively muted, equilibrium prices in 20 years for apartments in top tier cities could exceed 2 million yuan. A 90 square metre apartment in Beijing is already well above 2 million yuan now.