" More cities and counties will join in the property tightening initiative going forward."
Raymond Yeung & Betty Wang, Chief Economist Greater China & Senior China Economist, ANZ
In 2016 Chinese policymakers began to tighten the property market with many cities implementing demand-side measures such as purchase restrictions and higher down-payment requirements. However, the impact of these measures has proven to be short lived.
Of the 70 cities tracked by the National Bureau of Statistics (NBS), the number of cities which reported monthly price hikes rose to 56 in February this year from 46 in December 2016.
In addition, fixed asset investment (FAI) in the property sector increased 8.9 per cent in the first two months of 2017, accelerating from 6.9 per cent in 2016.
Against such a backdrop, more than 20 cities have announced city-specific property tightening measures since early March.
The launch of tightening measures in lower tier cities suggests demand for property is no longer limited to top tier cities. Since the central government has established a strong policy tone to regulate the real estate market at the Central Economic Work Conference in December 2016, ANZ Research believes more cities and even counties will join in the property tightening initiative going forward.
However, city-specific and regulatory tightening measures, especially those that aim at containing demand, can only temporarily cool a red hot property market but not fundamentally resolve structural issues.
The reality is nationwide property inventory levels continued to decrease despite the 2016 tightening measures, according to ANZ Research. In terms of floor space, the absolute level of inventory dropped to 3.27 billion square metres at end 2016 from 3.48 billion square metres in 2015.
However, when we take a more detailed look at provincial data, inventory conditions vary amongst different regions. Contrary to common perception, the destocking process in central provinces has outperformed that in the eastern provinces where most top tier cities are located.
Compared to other regions, the central provinces have the shortest cycle of about 2.3 years while north-eastern and western regions still suffered from high inventory levels which require three to four years to digest.
Nonetheless, our projection suggests China’s destocking process will continue. The property tightening measures introduced in 2016 had quickly led to a sharp decline in transaction growth to 7.7 per cent in November from 26 per cent in October, although it rebounded to 23.7 per cent over the first two months of 2017.
Assuming the current round of tightening will substantially slow the growth in property transactions to 7.7 per cent for the rest of 2017, the inventory turnover rate will still decrease, albeit at a slower rate, to reach 2.1 years by end-2018, a level last seen in 2012 when the property market was in a downturn.
However, we do not think China’s property prices will decline sharply.
1) Raising the mortgage interest rate. The average mortgage rate in China is around 4.52 per cent.
While the central bank has only lifted the money market rate so far but not the benchmark lending rate, we cannot exclude the possibility the benchmark mortgage rate may be adjusted further down the road. Lifting the carrying cost is expected to be much more effective in curbing demand, compared with adjusting the LTV which can only limit access to mortgage financing.
2) Imposing a property tax. Although the government has not included property tax reform as a priority in 2017, it has been identified as one of the reform areas for the next five years.
3) Massive supply of public houses. China has started to increase the provision of public housing over the past few years. However, these measures have had very limited impact on the private market.
Providing more public houses to ordinary families not only to low-income ones would be helpful to cool down the over-heating market and fulfil the pent-up demand at the same time. This policy direction requires a strong determination by the policymakers at the central government level.
Raymond Yeung is Chief Economist Greater China & Betty Wang is Senior China Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
03 Apr 2017
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