Commentators have not been shy in issuing dire forecasts for China’s property market. The sector, according to famously acerbic short-seller Jim Chanos, is on a “treadmill to hell.” Standard & Poor’s urged fresh skepticism by lowering its outlook on the sector to negative in June.
Prices are certainly high. Since the start of 2007, average residential prices in ten major cities have more than doubled, according to research by property consultancy Knight Frank and Holdways. But while the market seems to be overheated and tighter regulations are already causing price growth to slow, a dramatic correction – especially on the scale of those in the US and the UK – remains unlikely.
Strong macroeconomic trends continue to drive property price growth, including urbanization and rapid growth in per-capita incomes, said Liu Li-Gang, head of Greater China economics at ANZ. The government aims to raise the proportion of the population living in cities from 48% to 52% in the next five years, meaning demand should remain strong. While some are betting on social housing to subdue the market, the program targets a less-moneyed segment and does not overlap enough to offset higher-end demand – if anything, a flood of lower-priced social housing onto the market will only bring down average prices.
Low levels of indebtedness in China should also ease concerns – the average down-payment for a mortgage loan in China is now 40-50%, and Chinese homeowners have not been able to take out secondary mortgages against the equity of their homes. Meanwhile, income growth is outpacing property price increases. According to a report by research firm CLSA, house prices have grown at an average of 10% annually nationwide, compared with almost 13% for nominal incomes over the last five years.
One other factor will continue supporting prices for some time; with low returns on bank deposits and strict controls on moving renminbi offshore, property is still the best way for the wealthy to invest. “Even if prices decline somewhat, we don’t expect a lot of people to sell their property,” said Dong Linfeng, an analyst at Business Connect China. “Where would they put their money?”
The “treadmill to hell” analogy is more apt than Chanos intended: The treadmill may be aimed into the fiery abyss, but the market is unlikely to fall in.