China released updated house price data for May earlier this week, reporting a national increase of 0.7%, unchanged from the April levels.
While price growth is now starting to accelerate after slowing sharply at the beginning of the year, the strength on this occasion is being led by the nation’s smaller housing markets rather than in previous cycles where the gains happened in China’s largest centres.
Just have a look at the chart below from Nomura as evidence of the recent divergence in prices:
Those in smaller tier three and four cities are now leading the pack, outpacing that in larger tier one and two cities stemming from tougher buying restrictions implemented by local regulators to quash what was previously rapid growth.
“Stable headline property price inflation masked the divergence between top- and lower-tier cities,” says Yang Zhao and Wendy Chen, economists at Nomura.
“Property price growth in May in the four Tier-1 cities declined further to 0.1%, largely dragged by Shenzhen (-0.6%) while prices remained flat in Beijing and Shanghai.
“Property price inflation in lower-tier cities was higher. May prices rose by 0.6% month-on-month in Tier-2 cities and 0.9% in Tier-3/4 cities.”
According to the pair, this price divergence is “a sign that the property bubble is spreading to lower-tier cities”.
According to analysis from the Commonwealth Bank, new mortgage lending has soared by 25% year-on-year in 2017 despite China’s central bank looking to cap mortgage loans and promising to “strictly limit” the flow of credit into speculative property purchases.
However, while buyers are still finding value in smaller Chinese cities, Zhao and Chen don’t believe the current trend will last, suggesting that property price inflation will lose steam in coming months as “the impact of intensive policy tightening on the sector” becomes more apparent.
Given the relationship between price growth in larger cities to smaller cities in the past, it does appear that the former tends to lead the latter, suggesting that the same scenario could eventuate again on this occasion.