Chinese new home prices continued to accelerate in February, heightening fears that a new property bubble is forming in some larger Chinese centres.
According to China’s National Bureau of Statistics (NBS), new home price grew by 3.6% over the past 12 months, the fastest acceleration seen since June 2014. Nationally, prices jumped by 0.6% in February alone.
Property prices in Shenzhen – undeniably the housing bubble capital of China – jumped by an enormous 56.9% from a year earlier, leading gains across all major metropolitan areas.
The fear of missing out, or FOMO, is gripping Shenzhen property investors, as was the case in Shenzhen’s stock market at the end of 2014.
We all know how that ended.
Elsewhere prices in Shanghai increased by 20.6% while those in the nation’s capital, Beijing, grew by 12.9%. After correcting slightly between 2013 to 2015, the frothiness in China’s property market is back, if only in large tier one cities.
The bar chart below shows the comparative annual price performance in major Chinese cities.
Though price in larger cities accelerated sharply, in some cases by a ridiculous amounts, the strength is yet to be felt in all cities across the nation. According to the NBS, 32 of 70 cities covered in the survey saw prices increase from 12 months earlier, up slightly on the 25 in January.
The renewed interest in property investment follows a swathe of policy stimulus from Chinese policymakers, along with a reluctance from investors to dabble in the stock market given the rout seen in the second half of last year.
In February the People’s Bank of China (PBOC) cut the minimum mortgage down payment for first-home buyers from 25% to 20%, taking the required level to the lowest level ever.
Alongside the sweetener, it also lowered the minimum down payment for those looking to purchase a second home, dropping the rate by 10 percentage points to 30%.
In unison with six interest rate cuts since November 2014 and a number or reductions to the cash reserve requirement ratio for Chinese banks, it’s little wonder that investors are flocking back to property.
While policy easing and loosening of restrictions on property investment were implemented to help clear mounting unsold housing inventory in smaller Chinese cities – estimated to be 52 months supply according to analysis from the CBA based on the current pace of sales – it’s clear that while it’s helping to solve one problem, it’s merely creating another: a housing bubble in major Chinese cities.
The only question appears to be what will happen first; a recovery in house prices nationally or a bursting of the bubble.
Speaking on Tuesday this week, China’s housing minister, Chen Zhenggao, suggested that price divergence in China’s big and small cities poses a challenge for housing market policy controls, promising that the government will increase land supply in big cities to stabilize market sentiment.
While increasing supply is one response, it’s clear the recent price gains are being driven by speculation, egged on by policies implemented by the government and surging growth in shadow banking.
Before fueling that sentiment further by releasing more land to satisfy demand, there are far easier approaches available to policymakers to stymie the frenzy, including limiting the incentives to pile into what is an already hot market.
That’s what they should have done with the stock market frenzy of 2014, and it’s what they should be doing now.
The economy survived the stock market implosion. That won’t be the case if the property market is next.