Smaller cities key to na­tion­wide real es­tate pol­icy

China Daily (USA) - - VIEW -

China’s hous­ing mar­ket is ac­tive again. After a slump in 2014 and most of 2015, hous­ing starts are ris­ing, re­spond­ing to an ear­lier re­cov­ery in hous­ing sales that is also show­ing in hous­ing price in­creases. The re­newed en­thu­si­asm in real es­tate has been key in sup­port­ing GDP growth and heavy in­dus­try sec­tors, such as steel.

But the re­cov­ery is un­even, with signs of a price bub­ble emerg­ing in some, mostly large, cities, while in­ven­to­ries re­main high in oth­ers. Prop­erty prices in Tier-1 cities and some Tier-2 ones have risen sharply since early 2015. In Shenzhen and Shang­hai, they were around 38 per­cent higher on av­er­age in Au­gust than a year ago. The rally has also spilled over to the land mar­ket, with prices at auc­tions break­ing new records. Mean­while, mort­gage lend­ing is surg­ing and a record share of hous­ing sales is fi­nanced by lend­ing. That said, house­hold bal­ance sheets re­main rea­son­ably healthy over­all and loan-to­value ra­tios are still mod­er­ate.

At the same time, many Tier-3 and Tier-4 cities are still strug­gling to digest size­able in­ven­to­ries of un­sold hous­ing. Although hous­ing sales also re­cov­ered in smaller cities, bring­ing down stocks, they still re­main el­e­vated in com­par­i­son to his­tor­i­cal high lev­els. In­deed, the de­mand sup­ply sit­u­a­tion in most of the smaller cities re­mains very dif­fer­ent from that of the large ones, with many de­vel­op­ers hav­ing over­built with­out re­al­is­tic as­sess­ments of de­mand prospects.

De­vel­op­ments in the Tier-1 cities tend to get the lime­light and can have spill-over ef­fects, but since con­struc­tion and sales in the smaller cities make up the bulk of the na­tion­wide to­tal, the sit­u­a­tion there is more rep­re­sen­ta­tive of the over­all prop­erty sec­tor and thus, also key for na­tion­wide pol­i­cy­mak­ing.

Macroe­co­nomic pol­icy eas­ing has been an im­por­tant fac­tor be­hind the re­cov­ery in hous­ing sales and prices since early 2015. In­ter­est rates have been cut six times since mid-2014, and the re­serve re­quire­ment ra­tio five times. Also, early this year min­i­mum­down pay­ment re­quire­ments were cut na­tion­wide as the gov­ern­ment ac­tively sought to en­cour­age mort­gage lend­ing to spur sales and re­duce the high in­ven­to­ries of un­sold hous­ing.

The frenzy on the hous­ing mar­kets in the Tier-1 cities is in no small part a man­i­fes­ta­tion of China’s overly rapid credit growth pol­icy. As in the other parts of the econ­omy, the un­sus­tain­ably rapid credit growth – the gov­ern­ment aims at 16 per­cent this year – de­ployed to meet overly am­bi­tious GDP growth tar­gets is lead­ing to mis­al­lo­ca­tion and fi­nan­cial risks in the prop­erty mar­ket.

This begs the ques­tion of what pol­i­cy­mak­ers should and will do about the surg­ing hous­ing prices. In our view, over­all credit growth should be reined in at any rate. In ad­di­tion, spe­cific na­tion­wide steps to con­tain the hous­ing mar­ket frenzy and tame ex­ces­sive fi­nan­cial in­flows into prop­erty can be taken as well, in­clud­ing higher min­i­mum down pay­ments for mortgages. How­ever, in re­al­ity such na­tion­wide tight­en­ing will prob­a­bly be lim­ited, given that the over­heat­ing is not spread across the coun­try and China’s lead­er­ship con­sid­ers rapid credit growth and a re­cov­ery of real es­tate key to meet­ing GDP growth tar­gets. In the ab­sence of sig­nif­i­cant na­tion­wide steps, it would make sense for lo­cal gov­ern­ments to tighten de­mand in the over­heated cities by means of fur­ther city-spe­cific hous­ing pur­chase re­stric­tions, as well as to in­crease land sup­ply. In­deed, fol­low­ing re­cent re­stric­tions im­posed in var­i­ous cities, we ex­pect more cities to im­ple­ment such mea­sures in the com­ing months. Such tight­en­ing mea­sures are un­likely to have a ma­jor im­pact on the real econ­omy. While lever­age is ris­ing, loan-to-value ra­tios re­main mod­er­ate, mak­ing it un­likely that sig­nif­i­cant num­bers of home­buy­ers will en­ter neg­a­tive eq­uity, de­fault on their mortgages and be forced into “fire sales”. More im­por­tantly, a rel­a­tively cau­tious at­ti­tude of de­vel­op­ers dur­ing the cur­rent sales re­cov­ery and sig­nif­i­cant de­stock­ing since early 2016 mean that con­struc­tion does not have to ad­just as much to a sales slow­down as in 2014. The au­thor is head of Asia economics at Ox­ford Economics.


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