OPINION: 2014 Third-Quarter China Housing Market Outlook: Mega Cities Show Signs of Recovery

China’s housing market, swept by the gloomy sentiment for over half a year, revealed a silver lining in July. Two leading mega cities, Beijing and Shanghai, have witnessed an increase in the trading of both new homes and secondhand houses for the first time since March 2014. For Beijing, trade volume of residential housing stocks rose by 22.49% compared to June, and there are 200 more secondhand homes traded in the first eight days of August than that in July. Historical data in 2008 and 2011 suggest, could the trend of growing trading continue for two consecutive months, housing price will bounce. The market phenomenon, occurring each year and often referred to as “Gilded September and October”, is also expected to boost selling as homebuyers tend to settle their deals before the year-end. Therefore, at the end of the third quarter, China’s mega cities will see busier buy-and-sells in the housing market, while experiencing a mild increase in the average price.

First, careful scrutiny into several housing-market-crash theories revealed incoherence with reality. The average housing-price-to-income ratio in China’s large cities is over 10, which is far above the normal interval between 3 and 6. However, a Chinese young adult’s income is not the only source of financing for homes. Deeply rooted in most Chinese parents’ minds are that, owning a house is a symbol of happy family and any thriftiness for the sake of home buying is worthwhile. A newly married young couple are able to afford up to a 70% down payment on their housing mortgage loan by using the lifelong savings from their parents and grandparents. Such traditional ideal also prompted speculators to hoard housing stocks and seek arbitrage opportunities when housing price rises. This leads to an observed excess supply of housing stocks in many cities. Commentators fear that the surplus will eventually bring down housing price, and intensify the risk of housing market crash and credit default. However, new residential projects are banned and conditionally infeasible in hub areas of mega cities, such as Beijing’s central districts inside the Second Ring Road. Thus, it is equally non-negligible that the temporary surplus in housing stocks is potentially digestible and even insufficient to keep up with the huge urbanization scheme in progress.
From a broader perspective, the macroeconomic condition has twisted the negative expectation against housing price since June. The 7.5% annual GDP growth is not only an economic plan, but also a political promise for Beijing to realize its goal of doubling the GDP by 2020 set by the 18th Third Plenary Session. This requires rigorous fiscal expansion in the remaining two quarters to offset the downward pressure on investment growth. Land-based finance is the major fundraising approach for local governments, whose land revenue is directly related to the growing housing price. At monetary level, PBoC (People’s Bank of China) partially lowered the reserve ratio requirement twice, and released 1 trillion liquidity to China Development Bank using PSL (Pledged Supplementary Lending). Correspondingly, previous limitations on housing market transaction were loosed. For small and medium cities, property-purchasing restriction was cancelled in succession. Discount rate for housing mortgage reappeared in Beijing and Shanghai to support households’ demand for home purchasing, which has been oppressed due to higher borrowing barrier in the past three years. It is a rational estimation that any administrative intervention against home purchasing would quit by the end of 2015.
As a conclusion, both market data and poly forward guidance bode well for resurgence in Beijing and Shanghai’s housing market. Increasing transaction will be the trend for the third quarter, and housing price rally at the end of October is a large probability event.

This entry was posted on Monday, 11 August 2014 and is filed under ,,,,. You can follow any responses to this entry through the RSS 2.0. You can leave a response.

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