Several Chinese property developers posted sharp revenue and turnover growth last year, helping their share prices surge in Hong Kong. The rally saw some stocks even notch 50-100 percent gains over the last six months.
The housing boom, to a large extent, is rooted in China’s monetary policy.
The latest round of China’s housing price surge basically started from the stock market crash in 2015, when the government pumped massive liquidity into the market.
Home prices rose a further 30 percent since the beginning of this year.
Now, there are a number of reasons why the situation will not sustain.
With the stock market largely stable, China no longer needs an overly easy monetary environment. Authorities will now shift their focus to thwarting a surge in inflation.
Zhou Xiaochuan, China’s central bank governor, hinted before the Chinese New Year that the direction of monetary policy would tilt toward neutral.
Zhou warned again last week that loose monetary policy is coming to an end and the market should be wary of inflation risk.
The asset bubble usually won’t burst immediately when the monetary policy starts to tighten up, but the chance of down-cycle is much larger after one or two quarters.
Meanwhile, tighter property rules is another element in play that may bring a market reversal.
Numerous Chinese couples used “fake divorce” to get around home-purchase restrictions. Officials had in the past been turning a blind eye to such tricks. But Beijing municipal government recently unveiled more stringent measures to plug such loopholes, suggesting that authorities are getting serious.
In that sense, the government is set to unveil more tightening measures like tighter mortgage loans, property tax, etc, in the future.
Market forces in the real estate market could also bring about a home price correction.
Developers bought large chunks of land between the second half of 2014 and first half of 2015. Given an average development time of two to three years, the next supply surge will come at around the middle of this year.
When property firms compete to unload their inventory, home prices will soften.
This article appeared in the Hong Kong Economic Journal on March 29
Translation by Julie Zhu
[Chinese version 中文版]
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