Shenzhen’s meteoric housing market to slow in 2017, but risk of a bubble remains, analysts say

The pinnacle of China’s booming property market can be seen at its southern tip in Shenzhen, the country’s own “Silicon Valley”.

People from all over China are drawn to this mecca of technology, with start-ups and companies rapidly developing capabilities for internet and financial services, automation, robotics, artificial intelligence, and virtual reality.

This has turned Shenzhen into an immigration city where over 90 per cent of its residents are non-local, according to Bryan Chan, director of advisory services for South China at Colliers International.

The city houses the headquarters of such talent magnets as tech giant Tencent, smartphone maker Huawei, and insurance company Ping An.

“Shenzhen growth as a tech hub is rocketing,” said Jex Ng, managing director of South China for Jones Lang LaSalle (JLL). “Shenzhen has attracted the best talent from around China, or even from the rest of the world.”

As a result, the city has become one of the hottest residential markets in the world, with prices surging 76 per cent between the start of 2015 and August 2016, said Ng.

Average home prices in Shenzhen are now at 55,000 yuan per square metre, almost three times higher than the average in nearby tier one city Guangzhou, according to Chan.

Prices are even high in Shenzhen’s central districts – as much as 100,000 yuan per square metre in Futian, around 96,000 yuan in Nanshan, and 60,000 to 70,000 yuan in Luohu.

The rapid rise in home prices in Shenzhen and other cities promoted the central government to introduce a new round of tightening measures in late September and early October, covering at least 21 cities.

In Shenzhen, second home buyers now have to come up with at least a 70 per cent down payment, up from 40 percent, and further restrictions were applied for non-local residents.

These measures have been effective in dampening prices slightly in Shenzhen, with the market having likely experienced its peak, according to Ng.

The mass residential market has slowed in the short-term, while the luxury market has been hit hard as developers lose their appetite for investment, he said.

“We think the high-end potential buyers in Shenzhen will be quiet for a while,” Ng said. “But we don’t see this kind of demand suddenly disappearing.”

However, the slowdown in prices hasn’t alleviated concerns about a property bubble in the city.

“Prices are too high, so they are now undergoing a correction,” Colliers’ Chan said. “Everyone believes that Shenzhen’s market endurance will become progressively worse.”

While housing prices should track rising growth in gross domestic product (GDP), the upward trend in Shenzhen is much more “exaggerated” when compared to steady increases in Guangzhou, according to Sam Lai, senior director of advisory and transaction services at CBRE.

Currently, Shenzhen ranks near the top in terms of lack of affordability, with prices almost 37 times the average net income in the city in the first three quarters of the year, according to a report by E-House China R&D Institute.

“Any random house in Shenzhen can cost 10 million yuan,” Chan said. “A lot of industry employees are unable to afford the high housing and living costs, so they have had to move to nearby areas. Even Huawei had to move its offices out of the central area.”

Ng said there is a mild bubble phenomenon, particularly in richer new districts, but he believes the bubble will not burst at its current level.

High residential prices continue to be supported by affluent talent in the city, who have strong career prospects and salary expectations, according to Ng.

“They are all very highly educated, they are very talented [and] maybe a majority of them [have] a good family background in terms of wealth,” Ng said. “Their affordability is quite high.”

Ultimately, market fundamentals and the supply of high-skilled talent in Shenzhen will sustain property demand, according to Sylvia Zeng, head of research for South China at JLL.

“Technology, we think, is the key thing to drive up the fundamentals so we are optimistic about the demand side,” she said. “This is still a healthy property market.”