Understanding China’s ‘One-Way Bet’ Property Market

(Bloomberg) -- The history of China’s housing market is short by global standards, since private home ownership only began in 1998. But what a two decades it’s been. Home prices have skyrocketed, creating a mentality that real estate is a one-way bet. The government’s bouts of imposing restrictions then removing them has often exacerbated the frenzy, as speculators attempt to anticipate policy changes. President Xi Jinping is intent on reining in speculation, but policymakers must balance the desire to curb market excesses against the risk of provoking a collapse in prices that would shake the economy. Asian Development Bank Institute CEO Naoyuki Yoshino was quoted in May as saying China’s housing market is showing signs of a bubble, similar to Japan in the 1980s.

1. How important is it to the economy?

Economist Jonathan Anderson once called it “the most important sector in the universe,” because of its contribution to China’s growth and the global economy. Real estate directly accounts for about 6 percent of China’s gross domestic product and likely adds as much as 20 percent given its wider influence, according to Bloomberg Intelligence. China is the largest construction market in the world by a large margin, driving sales of everything from cement and steel to electrical appliances, furniture and cars. Housing is also the most important asset for Chinese households, with money manager Pacific Investment Management Co. estimating the market value at about $22 trillion. Outstanding home loans stand at $3.6 trillion.

2. Is real estate still seen as a one-way (up) bet?

To a degree, yes. Except for a dip during the global financial crisis, home prices have steadily (and sometimes precipitously) risen, driven by sizzling economic growth and urbanization. Prices started to soar in the early 2000s, and the central government took action to cool the market in 2010. But by the end of 2014, signs of a slowing economy and a glut of unsold homes prompted a shift in gears, with a stimulus package that included six interest-rate cuts in a year and an easing of down-payment requirements. A stock-market meltdown in 2015 only heightened the appeal of investing in real estate, which in China often means buying apartments.

3. What about the economic slowdown? U.S.-China trade war?

In 2018, the market softened slightly due to a sea of home-purchase restrictions and a cooling economy, yet residential sales for the year hit a record 12.6 trillion yuan ($1.8 trillion). The market has been shielded from the burgeoning trade spat with the U.S., with home prices gaining roughly 12% in the year from March 2018. Indeed, the sector has proven one of the few bright spots in a soggy economy, holding up while other economic indicators slow. Beijing’s repeated vow that it wants a stable home market, along with capital controls that have prevented too much money from leaving the country, have all helped to support property prices. One red flag: one-fifth of the urban housing stock is unoccupied, according to one study. That’s more than 50 million dwellings. While slower economic growth raises the prospect of curbs being eased yet again, state media has vowed that’s not an option. Some analysts predict transactions will fall in 2019 for the first time in five years.

4. How crazy did things get?

As an example, prices in the southern city of Shenzhen, home to 12 million people, surged by 150 percent from 2014 to 2016, forcing local officials to take measures to calm the situation. Those don’t always work: To get around bans on buying second homes in some cities, couples resorted to tactics such as fake divorces, so both spouses could qualify. Police in the financial hub of Shanghai had to restore order in 2016 when lines of people thronged real estate offices and clogged traffic. In 2017, after the government said it would create a special economic zone in Hebei province -- similar to Shenzhen and Shanghai’s Pudong -- hordes of prospective buyers flocked to the region, with some camping outside property agent offices overnight. That led to a temporary freeze on all property sales in the zone.

5. What is the government’s approach?

Back in 2010, then-Premier Wen Jiabao talked of devising a long-term “mechanism” for housing, meaning nationwide policies to curb speculation and stabilize prices. But his words -- at the annual global business gathering in Davos -- were followed by limited action, including the construction of some affordable housing for the poor. Without that grand “mechanism,” there’s been a patchwork of ad hoc policies, mostly local, on buying, selling and lending. The hawks came out again in early 2019. China’s housing ministry cautioned four cities in May over a three-month surge in their home prices. The Ministry of Housing and Urban-Rural Development urged local governments in Foshan, Suzhou, Dalian and Nanning to stabilize land and home prices to ensure a healthier development of the property market. That came after new-home prices rose slightly in April, adding to signs a market rebound may be taking hold.

6. Has China stopped trying to cool the market?

Not really. Xi repeatedly reminds the Chinese people that housing is for living in, not speculation, and there are signs that change is afoot. There’s a nationwide push for construction of more rental housing and, in Beijing, officials are experimenting with “joint-ownership housing” -- homes that are co-owned by individuals and the state. Officials have also vowed to let land owned by rural collectives be developed by builders -- if it’s to be used for rental housing. On the downside, rentals are a potentially less lucrative business for developers, while local governments -- which also are required to allocate more land for rentals -- face a future with potentially less revenue from land sales. That loss may not be tenable for some, putting a question mark over the whole project.

7. Will the rental push cool prices?

That’s anyone’s guess. Some analysts expect only a moderate impact, while others see prices being checked as the shabby low-end rental stock is upgraded. CLSA Ltd.’s Nicole Wong says cheap rental housing will only add to price pressure by allowing young professionals to save faster for home purchases. Others see price swings easing as some renters delay buying. The slated rental supply could spur about 30 percent of prospective buyers in Shanghai to defer purchases in the next five years and 10 percent in Beijing, according to Orient Securities Co. property analyst Zhu Jin. Beijing’s joint-ownership project may prompt another 20 percent to hold off from buying.

8. What else might the government do?

Premier Li Keqiang said in March 2018 the government will press ahead with a national property tax, a policy that had previously only been mooted. This is seen by some analysts as both the most significant measure for cooling speculation and the riskiest, since it has the potential to upend the perennially positive market sentiment. Other measures may include a wider trial of joint-ownership housing, mimicking Singapore’s approach of providing cheap starter homes. The annual supply of such homes in Beijing will be equivalent to about half the city’s new-home sales, according to China Securities Co.’s head of property research Chen Shen.

The Reference Shelf

• Homes are for living in, not speculation: Xi Jinping’s mantra.
• One in five apartments is empty.
• It looks like the market’s slowing.
• The push for rentals.
• QuickTake explainers on China’s meddling in markets and concern about financial risk.
• Beijing’s population dropped for the first time in 17 years. 

--With assistance from Laurence Arnold.

To contact Bloomberg News staff for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net;Emma Dong in Shanghai at edong10@bloomberg.net

To contact the editors responsible for this story: Grant Clark at gclark@bloomberg.net, Paul Geitner

©2019 Bloomberg L.P.

With assistance from Bloomberg