China’s property market soars to new highs
Last Updated: December 20, 2015
In Shanghai, the price index of second-hand houses rose by 8.31% (6.9% inflation-adjusted) during the year to October 2015, in contrast to a y-o-y decline of 0.17% (-1.84% inflation-adjusted) the previous year, based on figures from Ehomeday.
This was supported by recent data released by Colliers International, which showed that the average sales price of new houses in Shanghai rose by 18.6% to CNY31,844 (US$4,930) per square meter (sq. m.) in Q3 2015 from a year earlier, but unchanged from the previous quarter, buoyed by strong demand for high-end or luxury properties. The area between the inner ring road and the middle ring road saw the biggest increase in house prices.
In Q3 2015:
- Villa sale prices were up by 13.8% y-o-y to CNY34,874 (US$5,399) per sq. m., but were down by 3.9% q-o-q
- Apartment sale prices rose by 19.4% y-o-y to CNY31,424 (US$4,865) per sq. m., but were unchanged from the previous quarter
In Shanghai’s high-end market, the average residential property sale price stood at CNY59,534 (US$9,216) per sq. m. in Q3 2015, up by 8.1% from a year earlier, according to Colliers International. The average sale price of low- to mid-end properties rose by 10.2% y-o-y to CNY22,569 (US$3,494) per sq. m.
In Beijing, existing home prices rose by 4.9% in November 2015 from the same period last year, to an average of CNY43,349 (US$6,711) per sq. m., according to Century21 China Real Estate.
In Guangzhou’s ten urban districts, the average sale price of new houses rose by 10.5% y-o-y to CNY18,082 (US$2,799) per sq. m. in Q3 2015, according to the Guangzhou Municipal Land Resources and Housing Administrative Bureau. On a quarterly basis, Guangzhou house prices rose by 10.8% in Q3 2015.
In Shenzhen, the average sales price of new houses rose by 23% q-o-q to CNY35,628 (US$5,515) per sq. m. in Q3 2015, according to Colliers International. The sales price of four-bedroom units and duplex apartments recorded the biggest quarterly increase of 40.8% and 41.9%, to CNY47,306 (US$7,323) per sq. m. and CNY43,186 (US$6,685) per sq. m., respectively.
Too much government intervention?
Property prices in China rose rapidly from 2000 to 2008, fuelled by low interest rates and cheap credit. There was a 121% rise in the price index for second-hand homes in Shanghai (85% inflation-adjusted) from Q1 2003 to Q2 2008, according to Ehomeday. However during the global crisis, China's housing market slowed sharply from end-2008 to mid-2009.
Arguably, one of the Chinese housing market's central problems has been excessive government intervention, greatly exaggerating the housing cycle.
Repeatedly, the government has stepped in to avoid over-heating - then stepped in again, to avoid the resulting slump. So China's housing market see-saws between one extreme and the other, within the general context of an over-valued and over-stocked housing market.
Recent property cycles illustrate this.
In November 2008 the government introduced a CNY4 trillion (US$585 billion) post-financial crisis stimulus package.
Developers were now easily able obtain loans, with lower capital requirements.
Buyers too took advantage, with looser lending conditions and lower interest rates. The package reduced the property deed tax rate for first-time buyers of small apartments to 1% from 1.5% (January 2009 to December 2009), introduced stamp duty and land value-added tax exemptions, and exempted sellers of residential property from the 5.5% business tax, if the properties were sold after more than two years.
The result? Existing house prices surged by 19.82% in Beijing during 2013 (16.93% inflation-adjusted), and rose by 12.85% in Shanghai (10.13% inflation-adjusted).
Too much! The boom of led to uninhabited so-called ghost towns. The ratio of residential floor space under construction to floor space sold also rose sharply. In 2008, for every one sq. m. of space sold, 3.9 sq. m. was under construction. The ratio rose to a record high of around 4.4 sq. m. in 2012, according to China economist Patrick Chovanec.
In March 2013 the State Council introduced measures to reassert control:
- Major cities are now required to publish, every year, an annual housing price control target.
- Cities with overheating housing markets are required to increase their supply of commodity housing, and their land supply. Conversely, cities with declining prices are required to keep prices stable by stimulating housing demand.
- Where dwelling price rises exceed city price control targets, People’s Bank of China (PBOC) branches will increase down-payment requirements.
- Tighter mortgage restrictions on second home purchases were introduced, and buyers without a local registration barred from buying more than one property.
- Banks must not give loans to developers that hoard land, or participate in price-inflating activities.
- Local governments must boost low-income housing production.
- The government will continue to reform property taxes. The trial holding tax, first introduced in Shanghai and Chongqing, is to be implemented in other cities. Also to be implemented is a transaction tax.
One method of reducing upward pressure in the housing market is to increase social housing provision. So in October 2013 Beijing introduced a new scheme to house middle-income earners. These new dwellings would cost more than public housing, but 30% less than normal residential dwellings.
In November 2013, Shanghai's municipal government tightened by increasing minimum down payments for second home purchases from 60% to 70%. Non-Shanghai residents also faced tighter qualifications to purchase homes in Shanghai.
Some local governments implemented even stricter lending conditions, while banks slowed or even stopped mortgage lending.
Due to these tightening measures, the housing market slowed sharply. After robust price rises of 12.85% in 2013, during 2014 house prices dropped in Beijing and Shanghai by 4.16% (-5.67% inflation-adjusted) and 1.33% (-2.89% inflation-adjusted), respectively.
Now, after this downturn, we're into yet another reversal. Over the past year the government has eased property curbs, and on September 30, 2014 the central bank loosened mortgage restrictions, giving homeowners with paid-off mortgages wanting a second property the same terms as first-time buyers, including a down payment minimum of 30% (previous minimum: 60%). The central bank cut its benchmark one-year lending rate by 25 basis points to 4.35% in October 2015, the sixth rate cut since November 2014. Mortgage interest rates for first-home purchases fell to a new record low of 4.66% in November 2015. The government also recently announced a plan to purchase unsold residential properties, and convert them into low-cost housing, in order to reduce inventory levels.
In the first nine months of 2015, the value and the area of new residential property sales in China rose by 18.2% and 8.2%, respectively, from a year earlier, according to the National Bureau of Statistics of China.
Chinese yields still very low
When we first began to gather data on China, gross rental yields in all categories of Beijing condominiums were above 9%, and gross rental yields for villas in Beijing ranged from 9.5% to 13%. In Shanghai, returns were less stellar, with gross rental yields on apartments ranging from 5.4% to 7%.
Today, gross rental yields on almost all sizes of apartments in Beijing are below 2.5%, and in Shanghai below 3.2%.
We find the official statistics in China confusing. And as it happens, our own data-gathering in China has been rather inconsistent. We’ve relied on high-end expat-oriented sites some years, and on lower-end Chinese-language sites in other years.
But it is hard to escape the fact that prices have been climbing steeply, while rents have not moved much.
Yields below 3% are a danger signal. We were reluctant to join the chorus warning about a bubble in China in previous years, for the good reason that in 2008, apartments in most large cities in China had rental yields above 5%, a level which we generally consider ‘safe’.
However last year we declared that, with that yields of less than 3%, the danger signals were flashing red. We were the first to warn that a crash was likely in the Baltics, and then, our signal was that yields dropped below 3%. We gave similar warnings in Dubai.
So last year we gave the same warning about China – and we were right. It’s not been a exactly a crash, but for sure the period of market ebullience is over. Prices have risen so high that it is inconceivable that they will continue to rise.
Chengdu is an exception. Yields appear healthy here. We’re not sure if this is some kind of statistical fluke, and it certainly seems somewhat odd that yields on large apartments, according to our research, are above those on smaller apartments. But that’s the picture we get. Chengdu looks a little like Beijing and Shanghai used to look like, in terms of return on investment.
Taxation differs in each municipality in China
Rental Income: In general, leasing property is subject to business tax, individual income tax, and real estate tax. In Shanghai, gross rental income is taxed at an integrated rate of 5%.
Capital Gains: Net gains from transfer of property are taxed at a flat rate of 20%.
Inheritance: There is no inheritance or gift tax in China.
Residents: Rental income earned by resident individuals is taxed at a rate of 10%.
Buying costs are moderate in China
Total round-trip transaction costs are around 4.10% to 7.10% of the property value. Most of the costs are shouldered by the buyer, including the 3% Deed Tax.
Chinese law is pro-landlord
The Chinese system is generally pro-landlord.
Rent: There is no rent control in major centers such as Beijing, Shanghai, Guangzhou, and Shenzhen. Rent adjustments are subject to the provisions of the contract.
Guaranty Money: The landlord typically collects guarantee money (security deposit) of two to three months rent on top of a month's advance payment. If the tenant prematurely terminates the contract, he loses the guarantee money and down payment.
China's economy decelerated in 2015
China's economic growth is projected to be 6.8% this year, its lowest growth in 24 years, according to the International Monetary Fund (IMF).
From an average growth rate of 12.7% annually from 2005 to 2007, China has experienced a slowdown in recent years, with an average annual real GDP growth rate of 9.6% from 2008 to 2011. The country’s manufacturing sector grew only 5.7% during the year to September 2015. Likewise, fixed-asset investment growth slowed to 10.3% y-o-y during the first nine months of 2015.
In November 2013 China unveiled a 60-point reform plan to pave the way for China’s transition to consumption-driven growth. The plan includes boosting China’s urban population by easing the one-child policy.
This is not an easy transition for China.
Between June and August 2015, China’s stock market went into a meltdown, wiping out hundreds of billions of dollars in market capitalization. Triggering the crash was a relaxing of margin trades and concern over lofty valuations.
In August 11, 2015, PBOC devalued the yuan by 1.87% against the U.S. dollar, in a bid to boost the competitiveness of Chinese exports. The following day, the central bank devalued the yuan by another 1.62% against the U.S. dollar.
The risk of deflation is also growing. China’s annual consumer inflation stood at 1.5% in November 2015, according to the National Bureau of Statistics of China. Nationwide inflation was 2% in 2014, down from 2.6% in 2012 and 2013, and 5.4% in 2011
Yet urban unemployment remains low, at only 4.05% in September 2015. During the first nine months of 2015, China was able to create about 10.66 million new jobs for urban residents, according to the Ministry of Human Resources and Social Security.