China’s housing demand reports fraught with hidden dangers
Recent reports from Fitch Ratings and CICC ignore short-term risks and factor only long-term gains
Two recent reports may bring some comfort for investors amid concerns that China’s property market could be heading for a hard landing due to rising inventories and higher mortgage borrowings.
While the first report from global ratings agency Fitch indicates that housing demand in China would remain resilient over the next 15 years through 2030, the other from China International Capital Corporation indicates that the leverage in China’s housing market is well below the danger line.
However, there is still one area of concern as much of the optimism in both the reports is based on long-term factors, even as there are some short-term risks that need to be considered.
“Both the reports have made some assumptions, while in reality these assumption may not stand at all and could thus increase the upside or downside risks,” said Yan Yuejin, an analyst with E-house China R&D Institute. “Investors must treat these reports with adequate caution.”
The Fitch report said that China would need to build 800 million square metres of residential space, the size of Singapore, every year till 2030 to meet demand.
According to the Fitch report, potential demand in China would mainly come from four categories. These include people who need new houses as their old homes have been demolished, those who want to upgrade to better quality houses, ones who need new housing for marriage or family expansion requirements and increased demand from rural residents who have become urban residents.
Residents who need new housing due to demolition of their old homes will account for the largest chunk of buyers and account for 37 per cent of the total demand, or 4.4 billion sq m. Demand from residents needing housing for marriage or family expansion related matters would be around 31 per cent, or 3.7 billion sq m.
Urbanisation, which many expected to be the mainstay of demand, would require just 3 billion sq m as the pace is expected to slow in the next 15 years. In addition, most of the new urbanities can afford only small flats in cities, the Fitch report said.
However, the anticipated 800 million sq m per annum demand, is lower than the 1 billion sq m per annum of housing completions in recent years. That gap poses a potential oversupply risk, said analysts.
“Housing demand is based on long-term factors and hence translates into annual figures. Short-term demand volatility could be driven by factors such as economic fluctuations, the interest-rate environment, credit availability, the performance of other asset classes, and something that is unique to China – government policies,” said Wang Ying, the author of the report.
“If new supply maintains the current pace, there is a risk that during some years, the supply will far exceed demand. The larger the gap (supply-demand) is, the deeper the correction will be,” she said.
It should be noted that the report does not take into account speculative demand, nor completed, unsold housing inventories as both scenarios do not align with reality.
The National Bureau of Statistics’ data showed that by the end of July completed, unsold residential inventories reached 432 million sq m. But if one were to include the number of properties under construction and the acquired land that is to be developed into homes, the actual inventory would be at least 6 billion sq m, a number too big to ignore.
The CICC study, on the other hand, dismisses fears that China’s homebuyers have made excessive borrowings and the property bubble is about to burst. The agency’s data indicates that leverage levels across China is way below the warning line.
Outstanding mortgages was 16.8 trillion yuan by June 30, and accounted for 24 per cent of the annualised GDP over the past year, a low ratio compared to 41 per cent in Japan and 53 per cent in the United States, CICC said.
Assuming it takes an average eight years to pay off the mortgage, and the mortgage rate is 4.5 per cent, annual payment burden in China is 2.6 trillion yuan, or 8.2 per cent of national disposable income. If duration of these mortgage is 28 years, as it is in the US, annual payment is equivalent to 3.4 per cent of income, compared to 8.2 per cent in the US.
Other indicators, such as mortgage to household savings, or to total financial assets, is also far lower than that of US.
CICC said various indicators showed China’s growth in mortgages is driven by genuine demand, rather than speculation. However, the 31 per cent growth in the first half is “unsustainable”. Given the expected policy tightening in a few cities, there may be corrections, it said.
The report said that the government’s repeated steps to curb demand cannot stem the price rise. The real solution is supply side measures, such as boosting land supply in large cities.