Shenzhen tops Chinese cities in terms of home price risk, says think tank

Shenzhen has the highest home price risk among mainland Chinese cities, followed by Xiamen and Shanghai, according to the country’s top think tank.

The conclusion came from studying each city’s deviation from historical prices based on home price and rent levels versus household income, the Chinese Academy of Social Science (CASS) said in a report on Wednesday.

The study examined the home price to household income ratio in 35 Chinese cities, an index widely used around the world to gauge affordability, along with the home price to rent ratio, an index that is more location and time sensitive. The study then calculated the overall deviation from historical averages, with a higher deviation equivalent to a higher price risk.

The academy found that Shenzhen topped the overall risk rating, followed by Xiamen, Shanghai, Beijing and Nanjing. The study said that except for Guangzhou, all other first-tier city home price risk levels were “worrying” and that the risk in second-tier cities that have introduced recent purchasing curbs was “significant”.

The study also said current risks in these cities was even higher than that seen in 2010, a previous peak time that was followed by price drops.

The findings echo similar results from studies by private institutions, which have named Shenzhen, Xiamen and Hefei the Chinese cities with the biggest property bubbles.

Shenzhen’s new home prices surged 32.1 per cent year on year in October, according to the National Bureau of Statistics, though recent policy curbs have dampened the city’s transaction volume and prices fell 0.5 per cent month on month in October.

Xiamen and Shanghai’s new home prices jumped 45.9 and 37.4 per cent in the same period. Shanghai, Shenzhen and Beijing are now among the top 10 most expensive cities for homes in the world.

Ni Pengfei, director of National Economic Strategy under CASS and an author of the report, said the latest wave of cooling measures were adopted on a city-to-city basis, with most measures resorting to curbing eligibility of homebuyers.

“However, there are no measures that tackle the root causes of surging home prices. Fundamental reforms in the financial, fiscal and land fronts are needed,” he said.

For example, despite the shortage of residential land in first-tier cities, land supply hasn’t been increased. The clampdown on external fund inflows into the property sector for speculation purposes were not forceful enough.

Qiu Baoxing, former vice housing minster told a forum on Wednesday that the home price to rent ratio is more effective in gauging asset bubbles than the home price to income ratio.

“Home price to income ratio reflects the long-term, macro trend, but when it comes to specific location and timing it has lost its meaning. Home price to rent ratio is more agile and useful,’’ he said.

When price is 30 times rent or more, the price become “dangerous” while 20 times or below is considered safe, Qiu said.

Shenzhen’s average home price by various accounts is more than 50 times that of annual rent.

To stabilise long-term prices, he proposed emulating foreign cities by imposing consumption taxes on expensive houses and multiple homes, transfer taxes on home sales, and a vacancy tax and property tax.