Beijing — China's attempts to cool its overheated property market appear to be working, with many analysts forecasting a housing market slowdown in 2017 — but stagnant prices are likely to bring problems for other parts of world’s second-largest economy.
Data released on Friday showed that price growth had slowed sharply in top-tier cities such as Beijing and Shanghai. For the first time in two years, prices grew more slowly in such cities than in the overall urban market, according to the National Bureau of Statistics.
The data seemed to vindicate a plethora of official measures announced last month to restrain individuals from buying homes and developers from borrowing money. China’s housing market, however, is an important driver of economic output: construction and real estate made up a fifth of real gross domestic product growth in the first half of this year, according to China International Capital Corporation.
Not included in that figure is the demand for building materials, machinery and commodities. As a result, the government has had to make a trade-off between high economic growth and ever-increasing house prices.
Last week, the investment bank UBS projected China’s growth will fall from 6.7% to 6% in the next two years largely as a result of the property downturn.
"The major reason the Chinese economy stabilised this year, in addition to the major fiscal stimulus, was the property market recovery in the first three quarters," said Chi Lo, senior economist at BNP Paribas. "Construction contracts have fallen this year across China, as well as demand for materials such as concrete and aluminium for windows and doors," said Terry Li of CY Infotech, a construction technology company in Beijing. "We expect construction contracts to continue to fall next year as the controls on financing to developers kick in."
The key issue from this [property market] correction will be with developers, not with home buyersChi Lo
Senior economist at BNP Paribas
Last month, the government started restricting property developers from issuing bonds in the mainland and in the Hong Kong offshore market. No new bonds have been issued by developers so far this month, according to data compiled by economics consultancy Gavekal Dragonomics.
"It’s likely that the government will expand infrastructure investment to make up for the gap left by property-related investment falling," said Julia Wang, China economist at HSBC.
Wang noted that infrastructure investment is often used to stabilise economic growth when other sectors are weakening. She estimated that for every one percentage-point fall in property investment, the government would have to increase infrastructure investment by 0.7 percentage points in order to keep growth stable.
Outstanding mortgage loans have soared this year to over a fifth of total GDP, according to official data from Wind, a financial data service. But the chance of a US-style housing market collapse was small, argued Lo.
Lo pointed out that Chinese mortgages were rarely repackaged and sold on to other investors. As a result, the domestic market lacked the links between the housing market, lenders and the financial markets that are common in the west.
"The key issue from this [property market] correction will be with developers, not with home buyers," said Lo. "When transactions drop, as we saw earlier, this hurts cash flow and the ability of smaller developers to repay loans. Over the last property cycle we saw developers going under, and we could see further consolidation happen again."
So far, developers in top-tier cities are still cash-rich from this year’s high sales. For China’s younger generation, particularly those from regions in industrial decline, the job opportunities that cities such as Shanghai provide will ensure high demand for housing.
Together with the limited opportunities for financial investment, pent-up demand for top-tier housing is still high.
"The [property] slowdown is essentially policy-driven," said James Macdonald, head of research at Savills in Shanghai. "If the government finds they have slowed the market too aggressively, they have the ability to bring the market up again."
(c) Financial Times Limited 2016