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.
