International | Sep 29 2010
By Chris Shaw
Since April this year the Chinese property market has slowed significantly, which coincides with the government announcing a number of measures designed to cool what had been a hot market.
ANZ Banking Group head of China Economics Li-Gang Liu notes sales growth in August slowed to 9.7% year-to-date in year-on-year terms, which is down from a peak of 53% in November of last year. Transaction volumes have also fallen sharply, though property prices have remained relatively firm.
Liu points out while property transactions have cooled, floor space started has continued to increase and rental prices have picked up strongly in the major cities. This suggests underlying property demand remains solid.
In Liu's view the current market stand-off between developers and buyers can be traced to two factors. The first is both sides remain confident medium-term prices will continue to be supported thanks to solid demand for property.
The second factor in Liu's view is low funding costs continue to attract buyers to the market, as does the lack of alternative investment opportunities in Chinese financial markets. As Liu notes, there is almost a perfect mirror image between China's real mortgage rates and its property prices.
At present China is experiencing a negative real interest rate, meaning depositors are subsidising banks and debtors. Liu expects this will drive depositors to higher-yielding investment opportunities, which implies further speculation in the property market. Longer-term this has the potential to fuel a property bubble.
In Liu's view the People's Bank of China now needs to normalise interest rate policy, the likely first step being a raising of the deposit rate to alleviate losses suffered by ordinary depositors. Liu also suggests mortgage subsidies should be removed, while mortgage rates need to be lifted to rein in strong demand for property.
As well, and more importantly, Liu sees a need for a public housing program in China to provide more public rental housing to low and middle-income families in urban areas. Such policy moves should help maintain healthy development of China's property market, while also containing rapid price gains in urban areas in Liu's view.
Long-term, Liu continues to see substantial upside in the Chinese property market as despite the near-term pressures the market remains supported by China's rapid economic growth, the accelerating urbanisation trend and healthy household balance sheets.
Special Note: subscribers to FNArena can also download a Special Report by Dragonomics/GaveKal arguing the Chinese property market dynamics are going through a paradigm shift – see Special Reports on the FNArena website.
