A tale of two property markets
Cures for big-city housing bubbles have small-town side effects in China. By Miao Han in Beijing and Emma Dong in Shanghai
In China’s two-speed property market, prescriptions for deflating big-city bubbles are having unintended side-effects in smaller towns.
Soaring prices in the megacities of Beijing and Shanghai both snapped 20 months of gains in November after authorities tightened restrictions to reduce excessive speculation. Meanwhile, real estate in the northwestern rust-belt cities of Jilin and Harbin also declined, posting their first drops in four months.
Signs that prices stopped rising are good news for major cities as they show that policies are having the desired effect, but they’re less welcome in smaller towns where efforts to fill millions of empty homes weigh on prices. That disparity poses a new challenge for policymakers just as they pledge to ensure stability and step up the fight against speculation.
“China’s property market has complicated, structural problems,” said Wen Bin, a researcher at China Minsheng Banking Corp in Beijing. “Bubbles in big cities have much to do with financial leverage, whereas oversupply in third- and fourth-tier cities epitomises the lukewarm economy.”
Prices increased in November from the previous month in 55 of the 70 cities tracked by the government, according to data released late last month. They fell in 11 cities, six of which were in mid-sized markets that haven’t imposed any new purchase restrictions and are still dealing with big surpluses of empty homes.
Hohhot in Inner Mongolia, the northwestern industrial hub of Lanzhou and the southwestern tourism magnet Guilin also slumped, National Bureau of Statistics data showed.
Prices in Hohhot prices were up 1.1% in the first 11 months of 2016, while those in Lanzhou gained 3.6% from a year earlier. Beijing and Shanghai prices, meanwhile, both surged more than 20%.
Helping sentiment in smaller cities while trying to keep a lid on the froth in bigger ones is very difficult as major markets often function as a bellwether for those downmarket, according to Alan Jin, a property analyst at Mizuho Securities Asia in Hong Kong.
“They share the same sentiment and the same liquidity situation,” Jin said. “It’s impossible for any city to be immune to tightening. I’ve never seen any.”
Officials outside of the red-hot markets confront more ghost towns than bubbles. China has 13 million empty homes and continues to add to excess supply at a rate of 2 million units a year, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik.
“China’s real estate market is massively oversupplied,” they wrote in a recent report. “Worse, in the years ahead, demand is set to slow. The one-child policy has already crimped natural growth of the urban population. Rural-to-urban migration is ebbing as the supply of surplus rural workers is used up.”
The housing boom has largely been fuelled by surging liquidity amid a two-year easing cycle by the People’s Bank of China, which is keeping its benchmark interest rate at a record low. Cheap credit has flowed to property in top-tier cities, but less has found its way to real estate in less-populated areas.
Unsustainable prices and excess inventory coexist in China’s property markets, and more must be done to deflate a bubble that expanded this year by “strictly” curbing speculation, Yang Weimin, deputy director of the party’s top financial and economic panel, said at a recent forum in Beijing.
“We need to defuse a flurry of risks, contain asset bubbles and improve oversight to ensure there won’t be a systemic financial risk,” he said.
President Xi Jinping and his economic policymakers are pledging prudent and neutral monetary policy and greater focus on deflating asset bubbles as they work to ensure stability as they prepare for the twice-a-decade Communist Party congress later this year, when members of the top leadership committee are expected to be replaced.
“Houses are built to be inhabited, not for speculation,” they said in a statement released by the official Xinhua News Agency after a meeting this month. “Land supply should be increased reasonably in cities with strong pressure from rising prices. De-stocking efforts in third- and fourth-tier cities should be stressed.”
Xi reinforced that late last month, saying China should deflate property bubbles. “The country should accurately understand the residential feature of housing,” he told a gathering of elite economic officials. “The market will play the leading role in catering to multi-layered demand.”
As policymakers have worked to cool hot markets, the central government has refrained from broad monetary policy changes or national down-payment standards and instead instructed local officials to tailor their efforts to prevailing conditions. Authorities in several cities have introduced restrictions since September, with Shanghai and Tianjin stepping up curbs in November.
But curbs are just buying time for policymakers and won’t fundamentally solve the crucial problem of regional imbalances, said Tommy Xie, an economist at OCBC Bank in Singapore.
“They need to push forward the combined reforms as they’ve pledged in the statement,” Xie said. “But to deflate a bubble while cutting oversupply really isn’t easy.”
“China’s property market has complicated, structural problems. Bubbles in big cities have much to do with financial leverage, whereas oversupply in third- and fourth-tier cities epitomises the lukewarm economy” WEN BIN China Minsheng Banking Corp