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By Zhihua Zhou

China’s Latest Housing Boom: A Resurrection of the Old Development Model?

Mar. 29, 2016  |     |  0 comments


China has once again seen a warm up in the housing sector. In January and February of 2016, the total amount of transactions and floor space sold in commercial buildings nationwide amounted to RMB 905 billion and 112 million square meters, respectively, an increase of 43.6 percent and 28.2 percent year on year. Meanwhile, real estate investment in the first two months of 2016 grew by 3.0 percent compared to the same period in 2015, up from an annual increase of 1.0 percent for 2015. 1


It should be highlighted that China’s housing market is polarized across regions, with considerably more active ones in coastal regions in the East than that in other parts of the country, especially in the Western regions (Table 1).


Table 1. Key Indicators for Real Estate Sector Development, by Regions,

February 2016 (year on year growth, percent)

Nationwide

Eastern

Central

Western

Transaction Amount

43.6

57.7

30.4

13.8

Floor Space Sold

28.2

35.5

26.8

16.5

Real Estate Investment

3.0

3.7

4.3

-0.1

Source: National Bureau of Statistics. (12 March 2016). National Real Estate Investment and Market Performance in February 2016. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201603/t20160312_1330121.html


Overall, the number of cities that recorded price surges rose considerably. Of the 70 major cities monitored by the government, 25 reported price increases in newly built commercial buildings year on year in January 2016, compared to just one in January 2015. It is important to note that all 25 cities are in the first and second tier city categories. Particularly, the first tier cities, namely Beijing, Shanghai, Guangzhou and Shenzhen, are among the top with the fastest price increases of newly build commercial buildings (Table 2).


Table 2. Top Ten Cities with the Fastest Price Increases of Newly Built Commercial Buildings

January 2016 (percent)

Cities

Year-on-year

Month-on-month

Shenzhen

152.7

104.1

Shanghai

121.4

102.6

Beijing

111.3

101.1

Guangzhou

110.0

100.8

Nanjing

110.8

102.5

Xiamen

108.7

102.0

Hangzhou

107.1

100.9

Wuhan

105.6

101.0

Ningbo

104.6

100.5

Tianjin

104.1

100.5

Source: Bureau of National Statistics. (26 February 2015). Market Performance of 70 Major Cities in January 2016. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201602/t20160226_1323146.html


Several factors underlie the latest market boom. The first are the newly issued government policies aimed at supporting the market. China has witnessed record-breaking housing inventories, mostly in the low tier regions. The total floor area of commercial buildings for sale increased nearly threefold between December 2011 and February 2016, from 272 million square meters to 739 million square meters. 2


In November 2015, at the 11th meeting of the Central Financial and Fiscal Leading Group, CCP General Secretary Xi urged the reduction of housing inventories.3 Premier Li later proposed the acceleration of Hukou reforms to help rural migrants buy houses in the low tier regions.4 Several ministries and many local governments subsequently issued policies to stimulate housing sales including reducing transaction taxes, providing allowances on specific purchases, and lowering purchase thresholds. While many new measures are only applicable to non-first tier cities, certain policies are applicable to all cities, such as deed tax reductions, which have helped boost market transactions in first tier cities.


Second, housing demand remains very strong in high tier cities. Most of these cities have registered fast population growth in recent decades. With the better economy, residents have strong desires to upgrade their living conditions. Meanwhile, speculative demand is also strong in these cities. China has seen widening income inequality. Lacking alternative investment opportunities, the rich, mostly living in the high tier cities, are very keen on housing investment. In fact, the four first tier cities lack high housing inventories; they have seen stable prices in the previous years when most other regions have recorded price drops.


Third, monetary easing and the loose credit environment have greatly helped boost the housing market. As the head of People’s Bank of China stated on 26 February 2016, China is adopting relatively steady quantitative easing monetary policies.5 January 2016 has seen dramatic capital inflation. The year-on-year growth rate of M2 is 14 percent, 3.2 percentage points higher than that in January 2016; the newly increased social capital and newly increased bank loans rose by 66.8 percent and 72.8 percent year on year respectively.6 In particular, the housing sector recorded large capital inflows. Total individual mortgage loans for the first two months of 2016 rose 30.4 percent year on year.7 More specifically, large amounts of such capital have gone to the relatively prosperous markets in the high tier cities. For instance, the newly increased individual mortgage loans in January 2016 witnessed year-on-year increases of 42.5 percent and 199.2 percent in Shanghai and Beijing, respectively.8


Fourth, the declining supply and rising price of land has also accounted for the housing boom in the high tier cities. While total land supplies in the first tier cities in 2015 contracted by 25 percent year on year, the average land price increased by 19 percent year on year.9 Meanwhile, many developers have quit the depressed markets in the low tier regions and focused more on the markets in the high tier cities. Since the second half of 2015 the land market has seen record-breaking transactions in the high tier cities; many buyers have entered the markets, believing that housing prices will further go up in the first tier cities.


Last but not least, various informal financial means have lowered the purchase threshold and stimulated transactions in the high tier cities. Individuals with extra-cash collaborate with those who qualify for restricted purchases to buy houses and share the gains after re-selling them in the booming secondary market in the first tier cities, where purchase limitation policies apply. With lending from certain institutes, such as developers, real estate agencies, financial corporations, buyers in high tier cities can make downpayments as low as 5 percent of the total amount. This is much lower than the minimum stipulated by the People’s Bank of China, which is 30 percent for first-unit buyers in the first tier cities. However, such institutions have no interest in financing housing purchases in the markets with high inventories.



The nature of housing has changed from an economic engine to a socio-economic concern and future housing development is expected to target the improvements of construction quality, inhabitants’ living conditions, and environmental sustainability.



As a whole, the recent housing boom in the high tier cities is a product of supportive policies, easy monetary environment, strong demand, increasing price of land, and various informal financing means. Despite the recent boom, markets in many low tier regions remain stagnant. The floor space of commercial buildings nationwide for sale in February 2016 increased by 15.7 percent year on year.10 While many low tier regions are desperate to reduce the rising volume of inventories for economic revival, speculation and unaffordability have seemingly become the largest problems in the real estate markets of high tier cities. Indeed, more differentiated policies are needed for balanced real estate development.


It is also noticeable that the recent regional housing policies have focused more on the stimulation of housing consumption, rather than helping with rural migrants’ housing purchases and settlement in the low tier regions, as promoted by the leadership. It appears that local governments are trying to turn the housing industry into an engine to sustain their economies, as they did in the past. However, this mindset contradicts with the leadership’s recent New Normal strategy.


The New Normal has become a catch phrase in the leadership’s governance agenda, where it has sought to transform the investment-intense and export-reliant economic model to one based on innovation, consumption, and services; to focus more on economic restructuring to sustain both economic prosperity and social harmony. As such, the nature of housing has changed from an economic engine to a socio-economic concern and future housing development is expected to target the improvements of construction quality, inhabitants’ living conditions, and environmental sustainability. In fact, the investment-driven and housing-led model can no longer sustain due to overcapacity in certain industries like steel and cement, the need to protect arable land, and the high level of housing inventory. Under the New Normal, the real estate sector is expected to contribute less to the economy and local governments can expect to receive less revenue from the housing sector.


However, the deterioration in growth performance might have interrupted the leadership’s new efforts. The expansion in consumption is inadequate to serve as a strong new engine for growth. Real estate prosperity remains essential to attain the goal of 6.5 percent in GDP growth set out by the 13th Five-Year Plan. However, booming housing prosperity in only some high tier cities cannot reverse the overall economic deceleration.


Local governments might not have the same incentives as those in Beijing regarding housing development. In fact, they still heavily rely on the land sector for regional development, evident from the high ratio of 47.6 percent of land revenue to total fiscal income in 2015.11 Local governments, which are struggling with their fiscal situation for regional development, have no incentive to relocate the role of housing in the consumption-oriented economy model.


In addition, China has adopted easy monetary policies to meet the challenges of the international market (e.g., RMB depreciation, QE policies in other economies); this makes it very difficult to constrain housing price surges in an easy monetary environment and alleviate the housing unaffordability problem particularly in the high tier cities with relatively liberal and flourishing capital markets.


How to deal with this dilemma has become a big challenge for the leadership. Will it insist on changing the role of housing in the New Normal strategy, or join the local agencies to return to the housing-led development model? The 2016 Government Report released on March 5, 2016 helps clarify the stand of leadership in future housing development. The report indicates that the leadership intends to maintain the current supportive atmosphere for the national housing market to help sustain a GDP growth rate of 6.5 percent. With the statement of policy differentiation in the Report, we may expect to see more stimulus policies targeting the reduction of housing inventories. However, more rigid policies to constrain speculation, regulate the financial market, and increase land supplies are likely to cool the markets in the first tier cities. Nevertheless, with an easy monetary environment and strong demand, the first tier cities are expected to see further price surges in the near future.


The urge of policy differentiation means more power decentralization from the central to the local governments; this makes the role of local government more crucial in future housing development. To keep the local government in the same trajectory, the leadership needs to urgently work on the fiscal rearrangements and associated taxation reforms to remove local governments’ heavy reliance on the land sector. Local governments are then willing to commit to improvements of market mechanisms and the regulatory framework for healthy housing development. Without a fundamental overhaul of China’s fiscal system, local economies can easily fall back on investment-driven housing-led growth, which has already led to many economic problems.


Notes


1. National Bureau of Statistics. (19 January 2016). National Real Estate Investment and Market Performance in 2015. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201201/t20120117_12778.html; National Bureau of Statistics. (12 March 2016). National Real Estate Investment and Market Performance: January-February 2016. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201603/t20160312_1330121.html


2. National Bureau of Statistics. (17 January 2012). National Real Estate Investment and Market Performance in 2011. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201201/t20120117_12778.html; National Bureau of Statistics. (12 March 2016). National Real Estate Investment and Market Performance: January-February 2016. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201603/t20160312_1330121.html


3. Xi Jinping chaired the 11th Central Financial and Fiscal Leading Group. (10 November 2015). Xinhua Net. Retrieved from http://news.xinhuanet.com/politics/2015-11/10/c_1117099915.htm


4. Premier Li chaired the State Council Executive Meeting, Central Government. (11 November 2015. Retrieved from http://www.gov.cn/guowuyuan/2015-11/11/content_2964356.htm


5. The Central Bank mentions stable and relatively easy monetary policies for the first time. (27 February 2015). Xinhua Net. Retrieved from http://news.xinhuanet.com/fortune/2016-02/27/c_128757069.htm


6. People’s Bank of China. (16 February 2016). Financial and Statistical Data Report: January 2016. Retrieved from http://www.pbc.gov.cn/diaochatongjisi/116219/116225/3017530/index.html


7. National Bureau of Statistics. (12 March 2016). National Real Estate Investment and Market Performance in February 2016. Retrieved from (http://www.stats.gov.cn/tjsj/zxfb/201603/t20160312_1330121.html


8. People’s Bank of China. (18 February 2016). The Monetary and Credit System in Shanghai Operates Stably in January 2016. Retrieved from http://shanghai.pbc.gov.cn/fzhshanghai/113571/3018784/index.html; People’s Bank of China. (24 February 2016). The Performance of Monetary and Credit System in Beijing, January 2016. Retrieved from http://www.beijing.gov.cn/pbcyyglb/tjsj/t1425395.htm


9. China Index Academy. (2 January 2016). Report of Urban Land Market in 300 Chinese Cities: 2015. Retrieved from http://fdc.fang.com/report/9880.htm


10. National Bureau of Statistics. (12 March 2016). National Real Estate Investment and Market Performance: January-February 2016. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201603/t20160312_1330121.html


11. Ministry of Finance. (12 November 2015). Information on the National Fiscal Revenues. Retrieved from http://www.mof.gov.cn/zhengwuxinxi/redianzhuanti/quanguocaizhengshouzhiqingkuang/


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