Analysis
By December 2011, 46 first- and second-tier cities had implemented restrictions on the number of houses individuals could purchase, supplementing local-level trials of property taxes, interest rate hikes and tightened mortgage lending. That month, the 'house prosperity index' of overall prospects for the property sector dropped to 98.89 in December, lower than the 100 neutral point for a second consecutive month.
Amid expectations of property prices falling further, many potential buyers are choosing to 'wait and see', rather than making immediate purchases that take advantage of price cuts already seen. This has resulted in significant increases in unsold stock. By the end of 2011, over 27 million square metres of commodity housing remained unsold, accounting for about one-quarter of the total sales area.
Though the cooling measures implemented during 2011 have placed businesses operating in the sector under strain, falls in house prices to date are a market correction at most, restoring prices to a level more in line with fundamentals.
Genuine demand
Speculative investment in property certainly exists, but genuine demand is robust:
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Rapid urbanisation, income growth and cultural preferences underpin strong demand for housing
- China's huge population and rapid urbanisation mean that demand for housing, especially in urban areas, continues to grow rapidly (see CHINA: Transition to an urban society will be painful - January 20, 2012). In 2010, the officially stated per capita floor space of residential buildings in urban China was around 30 square metres. This falls far short of that in developed countries, and may be an overstatement, since it omits large numbers of rural-urban migrants.
- Another factor supporting demand is rapid household income growth. In 2011, the average increases of urban and rural per capita disposable income were 8.4% and 11.4% -- far in excess of house price inflation, which was estimated at around 5% in 2011.
- Cultural factors mean consumer behaviour is relatively insensitive to price, even if buyers 'wait and see' when prices appear poised to fall. To Chinese households, a house is not simply accommodation but also a symbol of social status. In some areas, home ownership is considered a prerequisite for marriage. During 2007-15, many of China's first single-child generation will get married. Many middle-aged and high-income people will buy houses for their children or even grandchildren.
Financial distortions
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For households, investment in property is typically a hedge against the loss of wealth rather than a bet on rising prices
The lack of alternative investment channels also contributes to rising house prices:
- Interest rates on bank deposits are mandated by the authorities, and are below inflation.
- A stock market crash in 2007-08 made many investors lose confidence and the stock markets have performed poorly thereafter.
Local governments make the market
Local governments support the housing market by deciding on infrastructure construction and funding it. As the ultimate land owner and the only legal institution through which land-use rights can be traded, local governments are also one of the largest beneficiaries of the housing market. In collusion with property developers, they have effectively taken almost half of house sales revenue through land seizures, taxes, fees and purchases of personal property on special terms, profiting both as institutions and as individuals.
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74% Estimated contribution of land sales to local government revenue in 2010
If house prices were to fall significantly, developers would face financial stress, which would reduce land sales and hit local government revenues. This would force local governments to cut back on social expenditure or sharply increase the tax burden on residents, with the potential to trigger public unrest. Thus, from the perspectives of both personal wealth and professional promotion prospects, they have a strong interest in seeing that prices do not fall too far.
Thus, local officials collaborate with developers to undermine central government policies. For example, Beijing requires local governments to build more affordable ('social') housing. However, local authorities and developers together work to ensure that most of these houses are built around the outskirts of cities, where land is worth less and commuting extremely inconvenient. This allows the local government to report a fall in average house prices, when in reality average prices have only been diluted by the addition of cheap, unwanted units while prices in the urban centres remain high.
Property-owning autocracy
It is likely that most senior government officials and their families participate in the property sector as a way of accumulating and preserving their own (probably enormous) personal wealth. They thus have the strongest possible incentive to ensure that prices do not collapse. If they believed that was imminent, they would lift restrictions on house purchases and the 'trial' property taxes now in place, and direct bank lending towards the property sector again (see CHINA: Beijing fails to quell fears over banks - October 26, 2011).
Cooling measures
Beijing's policies to curb rising house prices have several aims:
- They are part of comprehensive efforts to control generalised consumer price inflation.
- They are a warning to developers to ease off, signalling that if they do not then tougher measures lie ahead.
- They also, regardless of whether they work, parade the government's benevolence and attentiveness to its citizens' concerns.
Outlook
The first half of 2012 is likely to see both sales volume and prices of residential buildings continue to fall as a result of measures currently in place. Once consumer price inflation falls to a relatively stable level (around 3-4%), the property sector will be allowed to resume its former rise -- probably during the second half, and, particularly in the final quarter of 2012.
