China’s economic and monetary policies are overheating property markets in China’s tier-one cities. Investors should be wary of the potential for asset bubbles to form in local housing markets in Beijing, Shanghai, Guangzhou, and Shenzhen.
Property prices are rising dramatically across China’s “tier-one” cities: Beijing, Shanghai, Guangzhou, and Shenzhen. This trend is highlighted most dramatically in Shenzhen where housing and duplex apartment prices rose by 23% and 41.9% respectively in the 3rd quarter of 2015 according to Colliers International. Shenzhen’s housing prices rose by as much as 50% over the course of the last year according to Bloomberg News. Prices are similarly on the rise in the other “big four” economic hubs; Shanghai, for instance, saw a 17.5% annual increase in housing prices over 2015 in January 2016, according to a CRIC survey.
Blowing hot and cold
The dramatic increases in prices have led some to fear that a partial repeat of China’s 2010-2013 housing bubble is on the way for real estate markets in tier-one cities. In 2013, Beijing, Shanghai, and Shenzhen saw annual increases of 16, 17, and 20 per cent respectively. To head off the growing bubble, China’s national and local governments introduced measures to cool the market in 2013.
This resulted in a sharp downturn in the property market – so sharp, that the national government changed course to reheat the property market in order to soften the blow for investors and offset the broader downturn in demand for construction in 2014.
This vacillation between heating and cooling the property market – and China’s inability to find a happy medium between the two extremes – is at the heart of the risk for investors involved in the current tier-one real estate market.
Unintended consequences
This problem is compounded by the fact that China faces the unenviable task of simultaneously reducing the glut of inventory in small cities’ housing markets while cooling off the tier-one property market, as People’s Bank of China (PBOC) advisor Bai Chongen has pointed out.
In an effort to bolster the real estate market in second, third, and fourth tier cities which are littered with vast, vacant building complexes created during China’s post-2008 stimulus efforts, China has tried to ease restrictions on buying property and reduce down-payments on homes to encourage buyers. At the same time, to cope with China’s recent economic slowdown, the PBOC has reduced interest rates and cut the required reserve ratio.
However, these policies have also had unintended consequences. Rather than buying up the unoccupied property in second, third, and fourth tier cities where demand is low, investors have poured capital into the “big four” housing markets. As a result, China’s government is unintentionally re-inflating property market bubbles in Beijing, Shanghai, Gongzhou, and Shenzhen.
A Goldilocks dilemma
Yet again, China is trying to trim the sails in order to cool off the housing market in the “big four.” China’s National People’s Congress (NPC) has promised to increase restrictions on purchasing property in tier one cities. Chen Zhenggao, the head of China’s Housing Ministry, has promised to work with local governments to reduce prices through various measures, including a crackdown on illegal trading. Some have speculated that further measures may be in the works if the housing market continues to heat up in Shenzhen and Shanghai in particular.
As China struggles to find a “Goldilocks” solution for its tier-one housing markets – not too hot but not too cold – investors in these markets should be aware of the risks. On the one hand, China’s own National Academy of Economic Strategy has warned that if the market continues to overheat, a housing bubble could burst and prices could collapse as soon as the second half of 2016. On the other hand, investors face the risk that a government intervention to cool down the market could result in the same dramatic fluctuations as in the past, overcorrecting and leading to an abrupt and severe downturn for the market.
