26 October 2016
Rapidly surging home prices could undermine China’s efforts to contain rising costs and restructure its economy. Photo:
Rapidly surging home prices could undermine China’s efforts to contain rising costs and restructure its economy. Photo:

Why China’s housing market is due for a correction

A number of second-tier Chinese cities have tightened their housing policy as land prices keep surging.

More cities are likely to follow. China’s housing market may face a correction from as early as this month.

Compared with a year ago, land prices in top-tier cities have doubled.

In August alone, there were several record transactions in Shanghai, for instance.

The property market appears to be out of control after persistent land price gains and soaring transaction volumes.

In many second-tier cities, land prices have exceeded home prices.

Hefei, Suzhou and Nanjing unveiled measures to tame the red-hot housing market in the first half but these failed to curb speculative demand.

Chinese households keep taking out mortgages to finance home purchases.

Growth in mortgage loans has outstripped that in other categories, leaving the government increasingly concerned about the risk from an overheated market.

Massive capital has flowed into the property market as a result of declining investment return elsewhere amid an economic slowdown.

If housing prices rally too much too quickly, there could be several negative repercussions.

First, it could cause misallocation of resources and exacerbate the structural imbalance in the economy.

Second, it could further squeeze household spending in other sectors and affect the real economy.

Third, it could push up business and labor costs and hamper efforts to promote innovation.

Which is why even though property investment represents an important element in economic output, the government may still tighten its policy any time.

Growth in the property sector is likely to slow in the next 12 months.

A correction is just a matter of time and it is probably going to hit not a few cities.

In addition to tightening the policy grip, the government needs to get to the root of the problem, nurture new industries as growth engines to divert capital into more productive sectors.

Given the diversity across China, housing policy also needs to be adapted to specific local situations.

This article appeared in the Hong Kong Economic Journal on Sept. 19

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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