China: End of high growth period for China’s housing market
Published 5 December 2014
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This article is no longer current. Please refer to Overseas Business Risk - China
Summary
House prices continue to fall in China, but a nationwide crash remains unlikely, as urbanisation and continued upgrading by existing homeowners provides long-term structural demand. The housing market is maturing though, and as it accounts for as much as 30% of China’s GDP, this will mean a significant restructuring of the economy. Developers, heavy industry and local government revenues will bear the brunt of this adjustment, which will affect jobs and local government debt.
Detail
Prices continue to fall, but nationwide crash remains unlikely
China’s average house prices have been consistently falling throughout 2014, but this is largely a correction from a booming 2013. Over the year prices have fallen 10-15% in most of the 70 key cities surveyed, wiping out all the gains made last year. The picture is not uniform though, with prices most volatile in Guangzhou and Shenzhen where they rose 20% in 2013 before falling back this year.
Oversupply of housing is more acute in smaller cities, where new drivers of growth are often lacking. Price surveys don’t cover these cities, but developers, estate agents and local governments seem much more concerned with excess supply there.
Government intervention
The government’s interventions have been modest so far, suggesting they don’t predict an imminent collapse. Government interventions have largely been around reversing previous restrictions on buying second or third properties. In September the Central Bank also injected RMB 500 billion ($81 billion) into the five largest state banks, some of which was directed at encouraging lending for mortgages and construction of social housing. Analysts expect these measures to take effect and lead to the market stabilising next year.
The high growth phase is ending as the market matures
After a decade or so of rapid construction, overall supply has exceeded overall demand in recent years. Prior to 1998 almost all housing was state-owned and there was chronic underinvestment. The discounted sale of these properties to their tenants triggered a rapid growth in investment to make up for lost time. Now the most expensive, and profitable, segments of the market have reached saturation in many parts of the country.
Analysts differ as to when China will reach ‘peak housing’, but most agree that the high growth phase is over. Gavekal Dragonomics expect to reach the fastest rate of housing construction next year, as the most profitable segment of the market is fulfilled. As a result, they forecast a steady decline in construction volume to 15-20% below current levels by 2025. More bullish analysts point to urbanisation and the large numbers of ‘under-housed’, totalling around 300 million people, as sources of future demand.
Adjustment will mean a significant restructuring of the economy
Investment and construction of real estate contributed around 10% of China’s GDP in 2013. Adding in related markets such as construction materials and furnishings brings the figure closer to 30%. Real estate investment has grown 23% a year for the last 15 years. This year’s slowdown has brought home that this is not sustainable, leaving some local government officials concerned about where growth will come from next.
Developers, heavy industry and local government will bear the brunt
Homebuyers have little debt, but developers have borrowed heavily and smaller ones will struggle to survive. China’s housing market is unusual in so far as homebuyers have low levels of debt, while competition for land has driven developers to borrow heavily. One bank estimates that average debts have risen to 82% of company value, compared to 73% in 2013. Some consolidation is expected as the many smaller developers, who face higher costs of borrowing, struggle to compete.
Slower growth in construction will hit heavy industries, which are key providers of jobs. China’s steel industry sells around a quarter of its output to the housing industry, and several state-owned steel companies are already facing financial difficulties due to over capacity. Cement, copper and glass industries will also be heavily affected. These industries provide millions of jobs for low skilled workers, so will be tough to restructure.
The downturn presents a serious challenge to local government budgets: facing a significant shortfall between revenues and expenditures, local governments have in recent years become heavily reliant on land sales to plug the gap. Greater bond issuances and expanded use of public-private partnerships are both likely to provide part of the solution, along with a centralisation of some areas of expenditure.
Comment
Gradual saturation of the housing market has started at the high end and will work its way down over the coming years. Adjusting to this new normal typifies the Government’s challenge of smoothly weaning the economy off investment led growth and ensuring the sustainability of the public finances.
Disclaimer
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