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Monday 23 April 2012
The homes China builds may make or break it
Nine years have passed since Beijing embarked on a programme to cool China’s overheating housing market. Only recently have its tightening measures started to work with new supply stalled and prices no longer rising.
Volume down after cooling measures but prices have not changed much
Shu-ching jean chen in Hong Kong 20 April 2012
Nine years have passed since Beijing embarked on a programme to cool China’s overheating housing market. Only recently have its tightening measures started to work with new supply stalled and prices no longer rising.
But to bring prices down to what Premier Wen Jiabao recently described as a “reasonable” level commensurate with residents’ income promises to be tough going.
“In general, transaction volume has fallen quite significantly, at least from 2009 levels, but prices have been very firm so far,” said James Macdonald, head of Savills China Research consultancy. “We have not yet seen a significant correction in terms of prices in the overall market over the last couple of years.”
In the first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, transaction volume for new housing units has fallen by as much as 50 per cent.
Yet, prices had been heading the other way. Data published by the National Development and Reform Commission (NDRC) shows house prices rose by 2.9 per cent for the full year in 2011 and only peaked in August that year, after adding 18.6 per cent in 2010 and 25.5 per cent in 2009.
This year heralds a welcomed downward drift, with a mild cumulative house price decline at 3 per cent in January, according to the NDRC.
Premier Wen credited the recent success to policy-makers’ new-found wisdom in singling out speculative buying in the latest tightening measures.
Introduced since December 2009, these include higher mortgage requirements, restricting non-resident purchases and raising various taxes on developers. As prices remain stubborn, some analysts regard this as a sign of genuine demand. Others see it as proof of the country’s unsustainable wealth gap.
Many recognise house prices are indeed elevated in certain cities. The question is by how much?
Going by a common house price-to-income ratio of six, the reasonable price should be 5,734.5 yuan per square metre in Shanghai and 4,935.45 yuan in Beijing. But average home prices are four and five times that level in the two cities.
Numbeo, the global website which gives updates on the global cost of living weekly, ranks the latest housing price in Shenzhen, Shanghai and Beijing as among the world’s 10 most expensive cities.
It costs local residents 38.5, 37, and 35 years of annual income respectively to own a flat there, though they still trail behind Hong Kong’s 48-plus years.
Internationally, home prices stand at about six to eight times average annual income. A study shows that in first-tier Chinese cities, home prices stand at about 25.25 times of average annual income. In inland cities, this ratio is 12.07.
Nearly half of all the costs associated with constructing and developing housing projects, or 49.42 per cent, go to government agencies for land acquisition and taxes.
Using more conservative data like NDRC’s, JP Morgan estimated that China’s average home prices were 10.6 times annual income. For Beijing, the prices still stood at 23 times.
The most inflated house markets in China, analysts say, lie in places such as first-tier cities, populated coastal provinces, some commodities-heavy inland regions, such as Inner Mongolia’s Ordos and Shanxi, as well as the new development areas in second-tier cities earmarked by local governments in their urbanisation master plans.
Mr Macdonald of Savills China said local governments have been trying to forecast future demand to prepare master-planning infrastructure. But if the demand fails to materialise, it could pose potential risks.
One line of speculation, said Huang Yiping, chief economist for emerging Asia at Barclays Capital, is that China would want to go back to the good old days of early 2001. China’s home ownership is already a high 90 per cent, and private-built housing accounts for only 20 per cent of the market, with more than 70 per cent being old houses and those built by state-owned enterprises for their staff as part of a lifetime employment benefit.
The verdict is out. In a survey released in March polling depositors in 50 cities for the first quarter of the year, the People’s Bank of China, the central bank, found 67.7 per cent believed house prices are “too high, and hard to accept”. Still, this was a drop of 5.2 per cent over the previous quarter.
Andy Xie, an independent analyst, thinks China already has more housing than it needs, with living area per capita for more than 650 million urban residents already higher than in Europe and Japan. Properties under construction are enough to house another 200 million people, equivalent to 15 years’ increase in the urban population.
Meanwhile, land banks held by developers and local governments could house at least another 200 million more.
An imbalance is also emerging. Ren Rong, CEO of Harvest Capital Partners, of the state-owned China Resources Group, last month warned at a Credit Suisse’s investment conference that there was an oversupply of expensive units but not enough affordable housing.
Fellow panellist Jack Rodman, president of Global Distressed Solutions, pointed out that 60 to 70 per cent of every dollar in the Chinese banking system is secured by land, which runs against the often-made argument about the low debt in Chinese home owners’ mortgages.
As Beijing continues pricking the housing bubble, the broader economy is seeing a real estate-induced slowdown. Barclays’ Huang said real estate accounts for 25 per cent of all fixed asset investment, which in turn generates half of China’s GDP.
Hence, out of 12 per cent growth in GDP, real estate would be responsible for between 3 and 4 per cent GDP, with steel, cement, electricity and heavy machinery most vulnerable to slowing infrastructure and property investment.
“The worst fear is that private investment will drop by half,” Huang says. Even on its current growth trajectory Moody’s Jonathan Lee forecast that the country’s growth rate in steel demand will slow sharply to 5.7 per cent in 2012. The Chinese housing market hopes to land softly, sooner rather than later.
2 comments:
The homes China builds may make or break it
Volume down after cooling measures but prices have not changed much
Shu-ching jean chen in Hong Kong
20 April 2012
Nine years have passed since Beijing embarked on a programme to cool China’s overheating housing market. Only recently have its tightening measures started to work with new supply stalled and prices no longer rising.
But to bring prices down to what Premier Wen Jiabao recently described as a “reasonable” level commensurate with residents’ income promises to be tough going.
“In general, transaction volume has fallen quite significantly, at least from 2009 levels, but prices have been very firm so far,” said James Macdonald, head of Savills China Research consultancy. “We have not yet seen a significant correction in terms of prices in the overall market over the last couple of years.”
In the first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, transaction volume for new housing units has fallen by as much as 50 per cent.
Yet, prices had been heading the other way. Data published by the National Development and Reform Commission (NDRC) shows house prices rose by 2.9 per cent for the full year in 2011 and only peaked in August that year, after adding 18.6 per cent in 2010 and 25.5 per cent in 2009.
This year heralds a welcomed downward drift, with a mild cumulative house price decline at 3 per cent in January, according to the NDRC.
Premier Wen credited the recent success to policy-makers’ new-found wisdom in singling out speculative buying in the latest tightening measures.
Introduced since December 2009, these include higher mortgage requirements, restricting non-resident purchases and raising various taxes on developers. As prices remain stubborn, some analysts regard this as a sign of genuine demand. Others see it as proof of the country’s unsustainable wealth gap.
Many recognise house prices are indeed elevated in certain cities. The question is by how much?
Going by a common house price-to-income ratio of six, the reasonable price should be 5,734.5 yuan per square metre in Shanghai and 4,935.45 yuan in Beijing. But average home prices are four and five times that level in the two cities.
Numbeo, the global website which gives updates on the global cost of living weekly, ranks the latest housing price in Shenzhen, Shanghai and Beijing as among the world’s 10 most expensive cities.
It costs local residents 38.5, 37, and 35 years of annual income respectively to own a flat there, though they still trail behind Hong Kong’s 48-plus years.
Internationally, home prices stand at about six to eight times average annual income. A study shows that in first-tier Chinese cities, home prices stand at about 25.25 times of average annual income. In inland cities, this ratio is 12.07.
Nearly half of all the costs associated with constructing and developing housing projects, or 49.42 per cent, go to government agencies for land acquisition and taxes.
Using more conservative data like NDRC’s, JP Morgan estimated that China’s average home prices were 10.6 times annual income. For Beijing, the prices still stood at 23 times.
The most inflated house markets in China, analysts say, lie in places such as first-tier cities, populated coastal provinces, some commodities-heavy inland regions, such as Inner Mongolia’s Ordos and Shanxi, as well as the new development areas in second-tier cities earmarked by local governments in their urbanisation master plans.
Mr Macdonald of Savills China said local governments have been trying to forecast future demand to prepare master-planning infrastructure. But if the demand fails to materialise, it could pose potential risks.
One line of speculation, said Huang Yiping, chief economist for emerging Asia at Barclays Capital, is that China would want to go back to the good old days of early 2001. China’s home ownership is already a high 90 per cent, and private-built housing accounts for only 20 per cent of the market, with more than 70 per cent being old houses and those built by state-owned enterprises for their staff as part of a lifetime employment benefit.
The verdict is out. In a survey released in March polling depositors in 50 cities for the first quarter of the year, the People’s Bank of China, the central bank, found 67.7 per cent believed house prices are “too high, and hard to accept”. Still, this was a drop of 5.2 per cent over the previous quarter.
Andy Xie, an independent analyst, thinks China already has more housing than it needs, with living area per capita for more than 650 million urban residents already higher than in Europe and Japan. Properties under construction are enough to house another 200 million people, equivalent to 15 years’ increase in the urban population.
Meanwhile, land banks held by developers and local governments could house at least another 200 million more.
An imbalance is also emerging. Ren Rong, CEO of Harvest Capital Partners, of the state-owned China Resources Group, last month warned at a Credit Suisse’s investment conference that there was an oversupply of expensive units but not enough affordable housing.
Fellow panellist Jack Rodman, president of Global Distressed Solutions, pointed out that 60 to 70 per cent of every dollar in the Chinese banking system is secured by land, which runs against the often-made argument about the low debt in Chinese home owners’ mortgages.
As Beijing continues pricking the housing bubble, the broader economy is seeing a real estate-induced slowdown. Barclays’ Huang said real estate accounts for 25 per cent of all fixed asset investment, which in turn generates half of China’s GDP.
Hence, out of 12 per cent growth in GDP, real estate would be responsible for between 3 and 4 per cent GDP, with steel, cement, electricity and heavy machinery most vulnerable to slowing infrastructure and property investment.
“The worst fear is that private investment will drop by half,” Huang says. Even on its current growth trajectory Moody’s Jonathan Lee forecast that the country’s growth rate in steel demand will slow sharply to 5.7 per cent in 2012. The Chinese housing market hopes to land softly, sooner rather than later.
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