Poor economic data for July was followed up last week with official figures that showed the decline in residential property prices across China continued for the third straight month and had spread to a record number of cities, including Beijing.
The National Bureau of Statistics reported that average home prices slipped 0.9% in July from a month earlier, accelerating from a 0.5% month-on-month fall in June, and that average prices of new homes fell in 64 of 70 major cities monitored by the NBS.
On the national level this doesn’t look great and, digging into the regional and local level reports, the picture becomes bleaker. Already many regions saw their GDP growth decelerate in the first six months from a year earlier. So how badly could the downturn affect already struggling provinces? That really depends, according to H1 2014 data analyzed by China Business News.
The newspaper used the real estate investment-to-GDP ratio to calculate a given region’s dependence on property for economic development. For example Hainan has a high ratio of 36%; Guizhou and Yunnan come next with over 25%. All three are popular scenic spots benefitting from the surge in domestic tourism as incomes rise, and are seeing a hotel and resort boom. For relatively poor Guizhou and Yunnan, this construction frenzy is still good for the economy. Hainan on the other hand is reaching saturation in both hotels and houses – the price of a new residential home in Sanya, the provincial capital, fell 2.4% in July from a month earlier.
Coastal Fujian, which is close to Hainan, has a ratio of 22%, mostly coming from industrial projects. But the authorities there are also feeling the squeeze and recently decided to ease buying restrictions to provide some stability to the property market. That’s not a long-term cure.
In Chongqing, which has the fourth-highest ratio at 24.11%, there are fewer concerns over the slowing property market. The municipality is one of the big three emerging economies in Central China and has been building a solid industrial and services base to attract investment and new residents. Building homes and other necessary real estate can boost a region’s development.
The economic slowdown has also hurt the Northeast, home to polluting heavy industries that the central government wants to curb, shutdown or relocate, but exposure there to property is lower. “What kind of economic structure there is determines what the level of income is, while income level in turn determines the level and amount of real estate investment,” Ding Hai, associate professor of economics at Xiamen University, told the paper, pointing out the lower wages found in the North.
While most economists see the property market continuing to decline, few are predicting the kind of rapid fall that would overwhelm provinces heavily dependent on real estate. “In contrast to the now popular overinvestment [or] oversupply view, we do not think there is a massive investment problem for the whole China, there will be no big crash, and we do not expect a financial meltdown or GDP growth hard-landing,” economists at ANZ Bank said in a note.
But even if property markets don’t tank and take the economy with them, overinvesting in houses, offices and factories doesn’t bring much bang for one’s buck. As the IMF cautioned in a report last year, the investment efficiency of real estate in has been on the decline since the mid-2000s. Dependence on property is a longer-term structural concern.