Fears Overblown in China’s Residential Property Market

China’s home property market is an enigma, with widespread predictions of doom from multinational investment banks. But fears are overblown although certainly the pace of increase in prices has slowed on year-on-year new property sales during the first quarter of 2014.

Although stringent tightening measures were designed by the former Prime Minister, Wen Jiabao just before he left office in March 2013, the measures went unimplemented, contributing to a burst of pent-up demand that drove up prices sharply, by 9.5 percent for 2013.

We have analyzed prices in 70 cities across the country, from the Tier-1 cities like Beijing and Shanghai, down to Tier-3 cities of fewer than 500,000 residents. Our research indicates pent-up demand has begun to moderate as new home supply has increased and land sales to developers have risen.

Thus first-quarter new home sales fell by 7.7 percent annually in value and 5.7 percent in square footage terms, coming on the heels of an extraordinary strong 2013 for developers, with sales up 26.6 percent and 17.5 percent in value and volume terms.

There is undeniable oversupply in the retail property markets in some second-tier cities, with recurring news stories of so-called “ghost cities” popping up in the smaller cities. Overall sales in the coming quarters are expected to extend the widening declines in March and show deeper contractions, which are enticing large and small developers alike to offer promotional discounts to move inventory and support sales volume.

The state-owned news portal People.cn reported projects by Poly, Agile, and Wharf in Chengdu, the capital of Sichuan province, going on discounts including offering free car park spaces or interior furniture. According to the National Bureau of Statistics, new and existing home prices in Chengdu rose by 0.3 percent last month.

None of this portrays a market in crisis, although there are soft spots and hot spots in a country as variegated as China.

The so-called Tier 3 cities – cities with populations below 500,000 – are without doubt the most vulnerable to continuing corrections. Their prices have been the slowest to rise and the first to fall flat. By contrast, the Tier 1 cities – Shanghai, Beijing, Chongqing and Tianjin as well as the 10 provincial capitals – and Tier 2 – with populations between 500,000 and 2 million – are faring better,with price momentum still tilted towards the positive side.

Our research suggests that Tier 1 property prices will continue to grow at a 5 percent annual pace, The Tier 2 cities, which include provincial capitals and 50 prefecture-level cities, will probably grow at 3 percent annually and the T3 cities might see 1 percent growth in property prices.

Several Tier 2 cities are exhibiting very strong month-on-month price increases, even matching the top four Tier 1 metropolises. Examples include Zhengzhou, Xiamen, Changchun and Nanjing.

These are the best-scenario growth levels, which appear to indicate that the housing market is a kind of Goldilocks market, rational and relatively steady, one that deters speculators speculators while allowing wage growth to catch up to home prices. Urban wages gained7.2 percent annually during the first quarter of the year by comparison.

Price movements are most widely dispersed in the smaller Tier-3 cities, making a blanket lifting of price curbs nearly impossible to execute with satisfying outcomes despite repeated calls by developers seeking relief from purchase restrictions. So far, local housing authorities have held firm against any policy changes although the pressure is certainly mounting on the State Council to open the door for some of the weaker markets. There are nearly an equal number of places showing gains and declines of greater than 0.5percent during March, to illustrate the point.

Real estate fixed asset investment also moderated in the first quarter, down 3 percent to a 16.8 percent annual pace against 19.8 percent for full year 2013.

The deceleration of property investment is most evident in the western and central regions, in line with the weaker home prices in the lower tiered cities. Fixed-asset investment in the eastern and coastal cities is stronger, albeit also being softer at 17.7 percent for the first three months of 2014.

There also signs of moderation in the pace of land bank acquisitions. Property developers acquired 2.3 percent less land area annually during the first quarter and associated payments amounted to RMB155.6 bn, up just 11.4 percent after finishing 2013 on a high note of +33.9 percent.

Steve Wang is chief China economist and research director for REORIENT Securities Ltd. Of Hong Kong and a regular contributor to Asia Sentinel