Why China’s policymakers are caught in a property double bind
If an ever-increasing pile-up of unsold flats in small cities wasn’t worrying enough, Chinese policymakers are now grappling with an even bigger problem – a property price bubble in major cities.
Beijing’s steady policy support to the property sector since late 2014 to prop up one of the country’s most important industries has resulted in runaway prices in major cities while home sales in smaller cities have hardly budged, creating an intractable market duality that has made any uniform property policy difficult to implement.
The bubble fear is particularly pronounced in Shenzhen and Shanghai. In Shenzhen, the country’s third biggest city after Beijing and Shanghai, home prices jumped 72 per cent last month from a year ago. The same month, a new project in Shanghai priced at over 80,000 yuan a square metre sold 352 units in one day.
“The recent easing policies have spurred the market in first-tier cities, triggered by the expectations of greater appreciation,” said Ding Zuyu, chief executive of E-House China, a real estate services company. “The mood is too upbeat.”
After the central bank’s six interest rate cuts that have brought down the country’s mortgage rates to a record low, China has this year brought in a raft of measures aimed at boosting home sales. These include slashing down payment requirements, transaction taxes, and a cut in bank reserve requirement freeing up more cash to be pumped into the market.
While these moves were aimed at boosting demand and reducing inventories in smaller cities, they have only added fuel to a sizzling property market in first-tier cities while barely helping sales in smaller cities.
“The government hoped more bank lending would flow to smaller cities. What’s happened is the opposite as banks just want to lend more to big cities,” said Du Jinsong, head of Asia property research at Credit Suisse.
Hence, among the many unintended consequences of the government’s accommodative policies on property, credit is leaking furiously into major cities and pushing up home prices. The problem has prompted policymakers to introduce new measures to rein in the market in big cities.
Four first-tier cities have now started to curb down payment loans offered by non-bank financial institutions, including developers and housing agencies.
“I am not opposed to this measure but I’m worried that such crackdowns will disrupt market order,” Ding said, pointing out that loans like these are not the main reason for the price boom in most first-tier cities except Shenzhen, where speculators have been buying up much of the new projects.
In Shanghai, on the other hand, what’s driving the latest spike is undersupply, which, in turn, has been triggered by government measures. The city government had slowed issuing sales permits to developers in a bid to control prices. “But that was counterproductive,” Ding said, as it only ended up limiting supply and raising prices.
New commercial home supply in Shanghai plunged 73 per cent in February year on year, with home prices surging 24 per cent to a record 36,374 yuan per square metre, according to data from property agency Lianjia.
In smaller cities, government stimulus measures have similarly misfired. To help migrant workers settle down in cities, more than 50 city governments started to provide subsidies to homebuyers. But the subsidies only boosted sales of new units rather than easing the existing stock, Du said.
“Policy help on property sales may be short-lived and the outlook for housing inventory could worsen,” he said, adding that some local governments, such as Meishan in Sichuan, took advantage of improving sales to sell even more residential plots to developers, which could add to the inventory of unsold homes in the future.
Official data shows China had 718 million square metres of unsold commercial housing space at the end of last year, 15.6 per cent more than in 2014. This number does not include projects under construction or the ones on which work is yet to start. Factoring those in, says the China Index Academy, could take the figure to 6.2 billion square metres, a stockpile that would take five years to clear.
“The inventory level is too high. Rationally speaking, there should be no more new projects in smaller cities,” said Hong Hao, Bocom International chief China strategist. “It would be a very slow process, better to let third- and fourth-tiers cities sort the problem over time,” Ding said.
At the ongoing National People’s Congress (NPC) meeting, China’s top policymakers are urging more differentiated property policies based on local demand-supply conditions.
But Gong Min, a senior research manager at Shanghai Centaline Property Consultants, remains sceptical of any policy intervention. “How can you make sure that migrant workers will stay in lower-tier cities and not move to Shanghai or Beijing?” she said, expressing fears of further price pressures on big cities.
Beyond the housing sector, the property price divergence between cities underlines broader policy challenges as well.
“I haven’t seen such rapid polarisation between big and small cities in more than a decade. It seems Chinese policymakers keep trying to narrow the wealth gap between cities but their efforts come to nothing,” said Alan Chiang, head of residential, greater China, at DTZ/ Cushman & Wakefield.