What do you regard as the key indicators to watch when forecasting property prices in China’s major cities?
Our analysis shows sales volume growth tends to lead house price growth. But one must be wary of headline-only figures. For example, June national sales volumes growth was plus 14 per cent year-to-date, year on year. But the figure was minus 26 per cent for Tier 1 cities. Understanding policy shifts remains critical as the market continues to follow policy-driven cycles of easing and tightening.
To what extent are housing markets in different cities diverging in terms of prices and market forces?
Sales and price performance are highly divergent across city tiers and also districts of cities. Currently, the momentum is with the lower-tier cities, where prices and volumes are picking up.
China seems to have embarked on a plan to create several “megacities”; how do you anticipate developments like this affecting prices and the movement of people?
I think the high-speed rail lines and metro lines connecting mega cities with smaller cities are the most important factors. It has contributed to the boom in lower tier cities, possibly with a twist. People will move to bigger cities, make money there, but get outpriced. They can buy property back in their hometown easily.
Systemic risk is said to be accumulating in the form of rapidly rising Chinese household debt, mostly used to buy property. Could China be setting itself up as the world’s next financial crisis instigator?
Yes, the risk is certainly building up. It goes up with any increase in leverage, as has been the case for housing, but the starting point was quite low. We are probably at the point now where, if this continues, it could be a real systemic problem.
You have mentioned that the property development sector in China is very fragmented. Is this changing or evolving?
It’s a large, fragmented market for new home sales. There are over 1 billion square metres gross floor area in annual sales, and even the largest Chinese developer only sells around 2 to 3 per cent of that each year. Institutional investors focus on the top 10 or 20 listed developers in Hong Kong; but there are around 90,000 ‘real estate development enterprises’ in China, according to the National Bureau of Statistics.
There are drivers for consolidation. Limited land supply and rising land prices means it might be easier for larger players to buy smaller developers or their existing projects, rather than buy new land at auction. As policy tightens, more developers could therefore wind up being bought by larger developers.
Where are we now in terms of policy and what do you foresee for overall prices in the next few years?
We entered a clear policy tightening cycle around the end of September last year, with a visible slowdown in sales and price growth as a result. But we haven’t yet seen any interest rate hikes that would really affect the market, as mortgage lending has grown significantly.
I think the cycles will continue over the next few years, with this cycle being more important given the need for market stability ahead of the Party Congress in a couple of months.
What sectors of the property market in China do you see as having the best near to midterm future?
I think the new home sales market is becoming a ‘product market’, i.e., the quality of the product – the design, layout, size, fit-out – matters much more. Among major cities, we see positive near-term momentum in Wenzhou, Ningbo, Shenyang, Beihai, Chongqing and Dalian.