House prices in China are still rising, but there was a surprising twist in the latest data

Buildings under construction in Chongqing, China. (Photo by China Photos / Getty Images).
  • June data on Chinese real estate showed house prices rose in 63 out of 70 cities.
  • CBA analyst Vivek Dhar highlighted that gains were driven by Tier 2 cities instead of smaller Tier 3 cities.
  • While the rate of house price growth has slowed, Dhar said policy makers will need to remain vigilant to avoid a bubble.

The latest data on Chinese real estate showed home prices continued to rise in June.

CBA analyst Vivek Dhar said prices rose in 63 out of 70 cities in June, up from 61 cities in May.

But according to CBA analyst Vivek Dhar, there was a specific change that stood out in the latest results.

“In a surprise change from recent history, median new home prices in China’s medium-sized cities (Tier 2) eclipsed growth in China’s smaller cities (Tier 3 and below),” Dhar said.

Source: Commonwealth Bank

Due to its huge population, China has a tier system which categorises different cities based on metrics including GDP and population.

Outside of Tier 1 cities such as Beijing and Shanghai, many cities are now included in the Tier 2 category as more of the population moves to urban areas. Examples of Tier 2 cities include Hangzhou, Chongqing and Dalian.

Dhar said the price changes were reflective of the fact that many Tier 2 cities have loosened policy restrictions to attract talented workers.

That includes increasing the issuance of Hukou permits — a qualification which allows a person to become a legal resident of a given city, which in turn allows them access to the property market.

Conversely, authorities have clamped down on property redevelopments in Tier 3 shantytowns, which has served to cool activity in the lower end of the market. Dhar said prices in Tier 1 markets “tracked sideways” in June.

While a higher number of cities recorded price growth in June compared to May, Dhar said policy makers had been successful in slowing the rate of that growth.

“The property price slowdown was achieved through stricter measures on purchasing property, which have so far been applied in over 120 cities,” Dhar said.

Last month, new rules were implemented which banned companies from buying property in areas with home-purchase restrictions — previously a common tactic used by to bypass individual buyer caps.

That coincided with a plunge in the value of listed Chinese real estate companies on the CSI300, which slumped by more than 11% amid a broader market selloff stemming from concerns about excessive leverage in China’s financial system.

Dhar said that when it comes to house prices, policy makers will need to remain vigilant, as China’s property market has the capacity to turn quickly.

“Mortgage lending, for instance, was up nearly 19% in the first six months of the year. That could mean that attempts by China’s central bank to cap mortgage loans will need more enforcement.”