There are few things out there that can divide financial markets like China’s property market can.
Some think it’s a bubble, poised to pop at anytime and bring not only the Chinese but global economies down with it. Others think that, excluding some pretty steep prices in the nation’s largest cities, there’s nothing to fear, pointing to ongoing migration from rural to urban areas, helping to lower elevated inventory levels, particularly in smaller cities.
After years of price declines, the debate over the bubble or not has found renewed impetus in 2016, fueled by some eye-watering gains in large eastern cities, in turn fueled by a spike in mortgage debt.
That, in turn, had led to a renewed residential construction boom, something that has once again divided markets.
In the short-term, it’s helped to buttress economic growth after a less than stellar start to the year, although, in some people’s minds, the latest boom, following the even larger binge in the years following the global financial crisis, is merely sowing the seeds for a destructive drop in prices.
There’s no easy answer as to what exactly lies ahead — plenty have predicted the collapse of property prices in the past but, as yet, that hasn’t happened.
To Deutsche Bank economists Zhiwei Zhang and Li Zeng, China’s debt-fuelled property boom, and potential bust, will be one of the biggest issues facing the country’s policymakers in 2017, suggesting that rapid hikes in land sales and auction prices, as well as mounting debt levels, are areas that need close attention.
This chart from the bank shows the premium paid by property developers for land auctions in tier one, two and three cities in recent months. The percentage is the average increase on the auction starting price.
In a note released earlier this week, the pair said that “in the next few months we believe the government will put further pressure on developers by tightening broad credit growth”, suggesting that, as a consequence, “property sales and investment growth will likely slow further in (the first quarter of 2017)”.
It’s a slightly unnerving scenario, particularly given authorities in upwards of 20 major cities across the country have already taken steps to take the heat out of property prices.
If Deutsche Bank are correct and credit extended to developers slows, combined with other measures introduced to quell rapid price growth are maintained, it’s easy to see why concerns over the outlook for property, construction activity, financial stability and economic growth, already elevated, may become even more acute.
While some may take that view, Qu Hongbin and Julia Wang, economists at HSBC, are not. They suggest that should property investment slow in 2017, the impact on growth, at least compared to previous cycles, will be more modest on this occasion.
“First, the rally has largely occurred in the top 10-15 cities, where underlying demand remains very strong due to continued urban migration,” they say, noting that “the construction and investment follow-up has not been as strong as in previous cycles when the rally was more broad-based.
“Second, compared with past cycles when the property market rally generally coincided with stronger growth upturn, rising inflation, prompting broad-based monetary tightening, the policy response this time around has been more subtle and differentiated.
“In fact, the policy in a vast majority of cities, where prices have not increased that much, is still fairly supportive of ‘de-stocking’, encouraging property sales to lower inventory levels.
Essentially, the measures to cool price growth are limited to major centres, not smaller cities, and this is actually helping to reduce inventory levels, something that will help to underpin house prices.
While that’s a perfectly plausible assessment, it’s clear from developments over the past 18 months that where house prices in major cities head, those in smaller cities tend to follow.
This chart from the Commonwealth Bank underlines this point, not only showing the recent deceleration in house price growth in larger Chinese cities as a result of tighter buying restrictions, but also the relationship between price movements in those cities and smaller tier two and three centres.
If the same pattern is maintained in 2017, if prices in larger cities were to stall, or even fall, that could lead to renewed weakness in smaller centres.
It’s questionable whether potential home buyers would want to purchase when prices are on the way down, should that occur.
However, should such a scenario eventuate and lead to an even sharper decline in property investment, HSBC suggests that policymakers in China have another trick up their sleeve, and one that we’re already familiar with: infrastructure investment.
“Accounting for 17-20% of total fixed asset investment (and investment being 40-50% of GDP), a 10ppt [percentage point] slowdown in housing investment shaves approximately 0.7-1.0ppt off nominal growth,” it says.
“We are expecting a more modest slowdown, but even a 10ppt slowdown, which occurred in 2014-15, can be offset by faster growth in the other pillar of growth, which is infrastructure investment.
Indeed, there are already signs that this is occurring, perhaps preempted by policymakers ahead of an expected housing slowdown.
China’s National Development and Reform Commission (NDRC) has already approved infrastructure projects worth 338 billion yuan so far in November, adding to the 299 billion yuan approved in October.
To Vincent Chan, Weishen Deng and Ray Farris, analysts at Credit Suisse, not only does this suggest that the Chinese economy will end 2016 on a strong footing, but lays the foundation for even stronger levels of growth in 2017.
They note that the recent acceleration in infrastructure approvals followed the implementation of tighter restrictions on home purchases in some of China’s largest cities, suggesting that the government may be looking to counter an expected slowdown in residential construction through increased public works.