China price declines appear imminent

Overseas Education | Nisha Gopalan 15 Feb 2018

Nisha Gopalan

While all eyes are on China's stocks routafter the US swoon, there's a sector that's garnering fewer headlines but will have broader reverberations - real estate. Property stocks slumped last week, dragged down not just by the global sell-off but by worries this may be the year when housing finally takes a hit.

To date, Beijing's crackdown on risk amid soaring household debt has had little effect on prices.Decemberdatashowed values in small cities continued to rise, while they were mostly flat in top-tier conurbations like Guangzhou, Shenzhen and Beijing.

There are several reasons, though, why the13-year rally in house prices must end at some point.

First, banks are making borrowing tough, not only raising costs for home loans but also restricting supply,especially in major centers such as Beijing and Shenzhen, under a semi-official mortgage quota.

Even last year's stars, the second- and third-tier cities that led price gains, may fade as China curtails easy home loans that were intended to help soak up a glut of property.

Down payments there ranged between 20 and 30 percent, compared with 40 to 80 percent in top-tier locations, according to Credit Suisse Group. As the curbs bite, mortgage lending has started to decline.

Second, perhaps further down the line, a property tax is looming. Finance minister Xiao Jie indicated this might happen as early as 2020.

WhenPresident Xi Jinping exhorted people to remember that houses are for living, not speculating, real estate investors must have grown nervous; a tax will make them quake. With few investment options available to individuals beyond the volatile stock market and wealth-management products, it's no surprise that as much as25 percent of the demand for real estate is speculative.

Third, there's the more immediate threat to real estate prices of a supply-side push by Beijing.

The government is starting to shift from tamping down demand to promoting new housing. Among measures the government is promoting, according to BNP Paribas economist Chen Xingdong, is encouraging homes where the government and buyers share property rights, and even allowing state-owned firms to sell apartments to their employees.

The government is also encouraging the growth of a rental market.

While much of the current stock of rental housing is of poorquality, that's likely to change.

A wave of supply is bound to push down prices, and not just in the big cities.

This matters because real estate makes up almost three quarters of the assets of Chinese households, compared with a little more than one third in the United States, and has a much bigger wealth effect anyway than stocks.

Besides, a severe stock rout probably would trigger a rescue by the kind of"national team" of brokerages and other institutionsthat bailed out markets in 2015. Already, China's securities regulator is urging brokerages to prevent clients closing out positionsto limit share declines.

There's no such safety net for housing.

So while a crash is unlikely, aperiod of nationwide price declines can't be far away.


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