Chinese property prices begin to moderate

This is the second straight month property prices in 70 Chinese cities moderated after slowing for the first time in nearly two years in January. Property prices decelerated from 9.6 per cent year-on-year in January to 8.7 per cent in February.

Housing inflation is still relatively high, but property prices in tier 1 cities are starting to cool down. In Beijing, prices decelerated from 14.7 per cent year-on-year in January to 12.2 per cent in February, in Shanghai from 17.5 per cent to 15.7 per cent year-on-year, in Guangzhou from 18.6 per cent to 15.7 per cent year-on-year and in Shenzhen from 17.8 per cent to 15.6 per cent year-on-year. The same is also occurring in tier 2 cities and in the rest of the country.

The government has been trying to curb the real estate bubble that has been fueled by speculation since last year. Measures to help control speculative buying included introducing a tax on capital gains made on home sales, tightening mortgage guidelines and barring residents from owning more than two homes. Additionally, the government’s fight against corruption also has been affecting demand for high-end property. However, there is real property demand growth in China, and the government must support it while tackling prices. Authorities in Beijing already planned to introduce 70,000 homes for middle-income families which are planned to cost a third lower than the average residential property price. By tackling speculation while increasing real estate supply, property inflation is set to ease to more moderate levels.

The indicator is made up by calculating the property prices of each of the top 70 medium and large Chinese cities, and then averaging them by weight. It shows that housing inflation bottomed in May 2012 and that it is currently peaking, according to China’s National Bureau of Statistics. Property prices were still higher compared to the same month last year across all 70 cities except one in February. This is occurring amongst residential (both new and second-hand) and commercial properties. Second-hand homes are the most susceptible to speculation, which explains why they are the first to see their prices rise or fall at the start of each cycle. The rise in Chinese property prices is still taking place across China and across all type of property, but at a decelerating rate. Because of the government crackdown, second-hand homes are likeliest to lose value at a faster rate than the rest. A new long-term urbanisation plan announced this month targets an increase in the urbanisation rate. According to the plan, the urban hukou (household registration permits) ratio is targeted to increase from 35.3 per cent in 2012 to 45 per cent by 2020, the equivalent of around 160 million people. Also, 60 per cent of the population is planned to be a permanent urban resident by 2020. The rate is faster than in previous decades. The government has a serious task to create enough supply to meet the sharp rise in real estate demand without creating a housing bubble. Going forward, there will be a lot of inflationary pressures in the Chinese real estate market and the government will continue to have a role of controlling housing inflation.

The government is also trying to reform and liberalise the country’s financial sector. Although it is a long-term plan, the impact is already noticeable, and this will have a disinflationary impact on house prices. Many firms and property developers currently finance themselves through unconventional channels. Increasing regulation over these channels is driving these companies to improve their cash flows and to sell more rapidly at lower prices.

The author is an economist at Asiya Investments, an investment firm investing in Emerging Asia. Views expressed here are his own and do not reflect newspaper’s policy.