17 September 2019
China's property market has shown signs of improvement, but it is not out of the woods yet. Photo: Bloomberg
China's property market has shown signs of improvement, but it is not out of the woods yet. Photo: Bloomberg

Why China’s property market will remain sluggish

New-home prices rose in 18 Chinese cities in April on a month-on-month basis, compared with gains in 12 cities in March, official data showed this week. Meanwhile, commercial housing sales increased 7.63 percent year-on-year last month in terms of area, reversing a 0.83 percent decline in March.

The improvement, which came in the wake of monetary easing measures and relaxation of home-purchase limits, provides some comfort.

However, it would be a mistake if anyone assumes that the market is turning around firmly.

On the contrary, the sector could slow even further and drag down the nation’s economic recovery.

A huge divergence across different markets is a notable feature in China’s property market.

Per-capita GDP in first-tier cities like Beijing, Shanghai, Guangzhou and Shenzhen is more than two times the nation’s average. These big cities offer better employment and education plus high-quality infrastructure facilities, which have lured migrants and underpinned the local housing markets.

By contrast, smaller cities have far fewer migrants, but these cities have built up excessive housing.

Overall, the market is characterized by oversupply.

China’s housing supply has remained at about 10 million units each year, with an average size of 100 square meters per unit. The supply has surpassed the annual incremental demand of 8 million units. 

China’s housing market has a total of 10 million vacant homes, according to Zhu Min, deputy managing director of the International Monetary Fund. The huge excessive supply will exert a shock to the property market in next one or two years, as owners of the flats will be reluctant to hold on to the properties in light of dwindling return.

In addition, the low rental return rate suggests that housing prices are overvalued. The rental yield in first-tier cities is around 2 to 3 percent, compared with 2.25 percent of one-year deposit interest rate.

By contrast, the median rental yield in the US is 6.4 percent.

Based on the rental yields, housing prices remain excessively high in China. Prices have only dropped some 6.3 percent since last year.

Given this situation, the housing market is likely to move downward further in the months ahead. China’s real-estate development investment growth has eased to 6 percent in the first four months of this year from 8.5 percent in the first quarter.

Authorities have to find a new growth engine for the economy. The property market cannot be the answer. 

This article appeared in the Hong Kong Economic Journal on May 20.

Translation by Julie Zhu

[Chinese version中文版]

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columnist of the Hong Kong Economic Journal