An upcoming downturn of property market?

The housing market continues attracting the public attention in 2014. Housing market has been reported to collapse in several cities; meanwhile several cities rolled back home-purchase restrictions. What is the future of Chinese real estate market?

I believe that the market is facing adjustment. Looking into the past 15 years, though Shanghai housing market is on a rise in the whole, there exist some downturns. The market experienced 15-25% down in housing price during the period from 2005 to 2006, 2008 and again from 2010 to 2011. By now, Shanghai property market has been recovering in 27 consecutive months, hitting the longest increase period of history. Therefore if any pullback appears in Shanghai property market this year, I take it as a high-probability event rather than incident.

From the perspective of demand, excessive release of purchasing power is a major factor supporting the fall of property market. In 2013, the turnover of Shanghai housing exceeded 300 billion yuan, almost equaling the total sum of two previous years. Transaction on houses valuing over 50000 yuan achieved a year on year increase at 80%, exceeding the average performance. With transaction releasing, the purchasing power accumulated in the past is releasing gradually. And the weakness in the transactions of the first quarter this year is closely related.

Apart from the probably weak demand, pressure on supply grows more significant. On one hand, projects suspended due to governmental regulation resumed in 2013; on the other hand, lands sold at whopping price in 2013 accelerated to enter the market. Therefore, from the late half of this year to the next year, each area will come across a tide of housing supply. And the increase in supply of highly priced properties will be outstanding.

Take Shanghai as an example. Currently marketable luxurious properties valuing more than 50000 yuan count approximately 6000 sets. In the next two years, over 10,000 sets of such property will be ready for the market. Even counting by the sales of 2013 when luxurious properties are sold the best, these real estates needs more than 5 years to be consumed. Viewing from the transaction situation, since the demand cannot remain at a high position, such supply will take more time to be digested.

This will probably lead to adjustment in Shanghai property market in 2014. And such adjustment will inevitably occur in cities in similar situation such as Beijing and Guangzhou. In the third or fourth tier cities, the market’s need for price and sales volume adjustment has been observed early a year ago. The differentiated property market adjustment policies are just recognition and subsequent ratification of the reality.

In other words, the current price adjustment in first tier cities of China is nothing but regular market volatility. Will the long-expected market collapse follow the momentum?

For cities like Shanghai, I don’t see great possibility in this.

Traditional ways of taking Chinese property market as a whole blurs regional difference. It provides limited meaningful judgment. Regional differences must be taken into accounts so as to understand Chinese property market. Not only macro-factors affecting the overall housing prices should be recognized, but regional conditions should be taken as more important factors affecting local housing prices. In terms of time, long-term factors and short-term perturbations should also be distinguished.

For Shanghai, the most important long-term factors affecting the housing market include: continuous economic growth, low mortgage interest, constant lack of residential land supply, constant massive population inflow, and the city’s position as central city of eastern China even the whole country.

It is obvious that, though the growth rate of Chinese economy reduces, rapid growth at 7% will continue currently and in visible future. Interest marketization will lift actual interest, yet this remains a long-term process by now; and though residential land of Shanghai loosens a bit, there still exists an annual shortage of millions square meters of area; Shanghai is of no doubt an attraction for surrounding populations and the central city of China.

Therefore, as these long-term factors remain unchanged, it can be predicted that the scheduled property market adjustment may be another regular event. Yet many third and fourth tier cities are still under the threat of excessive supply in property market and outflow of population. The property market adjustment for these cities requires a longer period, may even longer than some people’s imagination.

Published on Xinhua Net | 2014-8-5