Data holes and short history make Chinese property market a puzzle

As China loosens policies to arrest a slowdown in property investment and the broader economy, debate has heated up over whether such efforts will add pressure to a housing market that many have called a bubble.

The slide in investment has Beijing worried enough to relax monetary policy. But policymakers should also be mindful that housing prices have hardly fallen from their peak, say analysts with a bearish view.

Andy Xie, a former Morgan Stanley economist now with Rosetta Stone Advisors in Shanghai, has for years been predicting a fall of up to 50 per cent in housing prices.

Debate over whether the market is in a bubble - and the consequences of a collapse in prices - has been simmering for a decade.

Still, some analysts take a more sanguine view, saying that a consolidation in prices will help the market to emerge on a more stable footing.

Scenes of miles upon miles of empty homes in Zhengzhou in CBS network's 60 minutes programme painted a graphic picture of oversupply when the report aired in March 2013 - at the onset of the current market downturn. Two years later, Andy Rothman, Matthews Asia investment strategist and formerly a CLSA economist, saw much busier roads and improving infrastructure when he visited the same area of Henan's capital that featured in the top-rating US show.

"[The] Chinese residential property market is clearly very soft right now, but a housing crisis is very unlikely," Rothman concluded in a video posted on the company's website.

Sharing this view is Andy Tan, the chief executive of real estate in Asia at Italian insurer Generali Group, which manages €28 billion (HK$248 billion) of real estate assets across the world.

"We do not see that the China market will crash. Our concern is more for external shocks which are hard to predict," he told the South China Morning Post. "We see the China real estate market going through a bit of consolidation in the next one to two years.

"It's not so much consolidation for a downturn, but rather consolidation to find a good equilibrium and long-term sustainable growth. So I think that's a good sign."

Tan said Generali would take the opportunity to establish long-term relationships with local partners and acquire a core portfolio that it could hold for years.

Both the bears and the bulls are armed with plenty of facts and data - sometimes even from the same numbers - to back their arguments. Yet official data, particularly on prices, is insufficient.

China's private real estate market only came into being in 1998, while the market itself and the Chinese economy bear very different characteristics to their advanced peers.

"The price indices for property in China are very problematic," the Peterson Institute for International Economics said in a recent report.

The longest-running property data was on prices of newly constructed residential properties, and the headline index of 70 cities treated all cities and properties the same, the institute said.

More importantly, given how quickly new homes had been constructed as a percentage of total floor space sold, there were very few repeat sales, it added. "This, combined with the lack of hedonic indices … for the changing quality, location premium, and other time varying factors, makes it difficult to measure the value similar properties over time."

The institute created its own index that showed a near 80 per cent gain in real property prices from 2005 to 2010, against an official 21 per cent rise for the period.

Another index was developed by four independent researchers: Fang Hanming from the University of Pennsylvania, Xiong Wei from Princeton University, Peking University's Gu Quanlin and Zhou Li'an.

Their work, published last month as a working paper of the US-based National Bureau of Economic Research, showed average annual real housing price growth of 13.1 per cent in the decade from 2003. Annual housing inflation was slower in 31 second-tier cities, which are municipalities and provincial capitals, at 10.5 per cent, and 7.9 per cent in the 85 third-tier cities they covered.

"Fast property price rises don't necessarily mean property bubbles," Niu Fengrui, a senior government researcher at the Chinese Academy of Social Sciences, told a forum in Beijing this month, while publishing the think tank's blue yearbook on the country's real estate market. "Fast property price rises can be a sign of undersupply, and can also mean a reasonable restoration of underlying property prices."

Niu's calculation showed property prices rose 10.2 per cent per annum in the past decade, but were strongly supported by an average annual rise of 13.3 per cent in per capita income.

On housing affordability, an International Monetary Fund working paper published last month said China's average nationwide housing prices remained high at about 22 times average annual disposable income in 2013, with first-tier cities reaching a multiple of more than 30, although the ratio has declined from its peak in 2010.

The authors of the IMF report are Mali Chivakul, Raphael Lam, Liu Xiaoguang, Vojciech Maliszewski and Alfred Schipke.

The National Bureau of Statistics will today publish last month's home price changes in 70 cities.

Prices have shown some signs of stabilisation recently under a slew of supportive government measures, led by pickups in big cities such as Beijing, Shanghai and Shenzhen.

A private index measuring average new home prices across 100 cities - compiled by a unit of SouFun Holdings, the country's biggest real estate website operator - showed monthly declines narrowed to 0.01 per cent last month from March's 0.15 per cent.

These are the two sets of home price indices most often quoted by market analysts.

Despite imperfect data, China's real estate market, of which 70 per cent is residential, is too important for the overall economy to be overlooked. Its investment accounts for 15 per cent of gross domestic product and affects more than 40 other sectors in the supply chain. Moreover, the fortunes of the industry weigh on a range of other economies and currencies, including Australia's.

In the first four months of this year, new home sales fell 5 per cent from a year earlier, still an improvement from a decline of 9.8 per cent in the first quarter.

Signs of market recovery were also seen in newly started home construction, with the annual decline narrowing to 19.6 per cent in the January-April period from a fall of 20.9 per cent in the first quarter.

However, inventories are still building up. This bodes ill for property investment, whose annual growth slowed to 6 per cent in the first four months from 8.5 per cent in the first quarter.

The IMF report said: "The ratcheting up of unsold residential housing units in 2014 also appears to be more severe than in previous downturns [in 2008-09 and 2011-12].

"Housing inventories did not normalise before ratcheting up again during 2014, particularly in the third and fourth-tier cities and in the industrial northeast region, adding to an even higher buildup of inventory."

The authors found that data from 134 local housing bureaus indicated a much more severe inventory backlog, equating to 24 months of sales in mid-2014, than the level of about four months implied in the NBS data.

They estimated that the overcapacity would lead to a 4.2 per cent fall in real estate investment this year, which would imply a 0.4 percentage point drop in GDP growth.

Efforts to wind down overcapacity in certain industries, such as steel and cement, would create some uncertainties for housing demand in cities reliant on such industries, said Su Aik Lim, a senior director at Fitch Ratings.

Therefore, it was important to consider local government's policies in broadening China's economic development, and whether the property development projects would benefit from such transformation, he told the Post.

To stimulate housing demand, China has cut interest rates three times since November last year and pumped several trillion yuan of liquidity into the economy by cutting banks' reserve requirement ratios. The benchmark mortgage rate is at its lowest since at least 1991.

Excess liquidity was a major reason behind former premier Wen Jiabao's failure to rein in housing inflation during his 10-year term, economists said.

They expect his successor Li Keqiang will continue to cut interest rates, at least once by the end of September, and to further reduce banks' required reserves.

That is stoking worries about banks' rising exposure to the real estate sector. Fitch said this month that "property exposure is the biggest threat to the viability of China's banks due to the strong linkages between the property sector and other parts of the economy, and the banking system's reliance on real estate collateral".

It estimated that loans secured by property increased 400 per cent since the end of 2008, compared with a 260 per cent rise in overall loans. Loans secured by property now make up 40 per cent of all bank lending.

The bulls, however, often cite high down payments of more than 30 per cent in China and the absence of derivatives connected to property lending that led to the US subprime crisis.