China’s census suggests property boom days may be over

The census results released by China’s National Bureau of Statistics earlier this month confirmed a challenging reality for the country – its population growth is slowing, and quickly. China’s population still grew over 5 per cent between 2010 and 2020, but this figure was the lowest increase on record since the founding of the People’s Republic. Demographers and economists are focused heavily on how such a low birth rate and likely shrinking of the population will impact the domestic economy and broader society. But this trend will have a more immediate impact on one of China’s most impressive growth segments since it liberalised its economy – the real estate market. Property prices have steadily increased, with home prices rising 23 per cent since 2010. Despite policy curbs, home prices grew at the fastest pace in eight months in April, with new home prices up by about 0.5 per cent month on month and sales up by about a third year on year. Looking forward, supply-side policies to limit price growth will continue to tighten, and demographic challenges will change the demand outlook. Taken together, it’s apparent that the residential market’s boom days are likely behind us – both in terms of prices increases and developers’ record profits. Rising property prices have been driven mainly by a growing middle class investing in real estate, with affluent households seeking yield and income on the one hand, and local governments relying on high prices to drive highly lucrative land sales to developers on the other. Chinese policymakers are keen to avoid painful economic shocks, and the central government sees the property market as a major risk. President Xi Jinping declared in 2017 that “houses are for living in, not for speculation” – a principle that has guided the authorities in deploying more stringent price-curbing measures. China’s economic model means the government can take a relatively more active role in guiding market forces. With property in first-tier and now second-tier cities becoming increasingly unaffordable, the central government has shown its willingness to act. Over the past years, the government has instituted land reforms and introduced new restrictions on property financing to better control the supply and demand components and prevent overheating. When will Beijing wake up to China’s demographic crisis? On the supply side, reform means reclassifying state-owned land into commercial, industrial and commercial purposes. According to the Ministry of Land and Resources, starting from 2018 only around 14 per cent of state-owned land will be allocated for residential construction, compared to nearly 19 per cent in 2013. Easy liquidity for Chinese developers from state-owned banks has historically been a major driver of property prices, but last year the government deployed “three red lines” to limit property development financing. This initiative places a cap on the liability-to-asset ratio, which reduces net gearing and limits cash to the short-term debt ratio. The People’s Bank of China also issued a regulation to cap outstanding property loans at 40 per cent of total loans at China’s big four banks. These supply-side cooling policies have had some success in managing price growth, but it’s on the demand side where more powerful economic forces take shape. Along with a slowing population growth rate, the census data also revealed that the number of first-time housing buyers peaked in 2017. Household formation – specifically the number of marriages per year – is also on the decline. These are the most important drivers for the property market and represent longer-term structural headwinds. Already, the market is seeing vacancy rates on the rise in many cities – for example, Dalian, Harbin, Changchun and Shenyang have vacancy rates averaging around 22 per cent – compared to the already high 15 per cent in Shenzhen and 16 per cent in Shanghai. How Shanghai middle class is shattering the US ‘China threat’ caricature While upcoming hukou or household registration reform could drive further urbanisation into top-tier cities, this simply moves housing demand around internally without generating new demand. This could further inflate property prices and make housing unaffordable in big cities, worsening regional inequality. Changes in access to investment products may also drive investors away from real estate as an asset class. Individual Chinese investors have historically had access to a limited range of wealth management products offered by banks; they might also have been badly burned investing directly in stocks during the cycles of market volatility since the 2008 financial crisis. Increasingly though, investors are getting into the public markets through managed funds as well as passive ETFs – this is a welcome diversification away from real estate speculation. Policymakers need to walk a fine line. While 10 years ago, the residential property market was supported by government policy and favourable demographics, the winds have now changed. China’s April real estate investment growth slowed to about 21 per cent year over year, 4 per cent lower than in the prior three months. This slowdown could become a larger trend this year. David Chao is Invesco’s global market strategist for Asia-Pacific