Despite having shot up in recent years, China’s home prices could still be sustainable.
Given the robust demand for homes, China’s sky-high prices can be maintained provided the government curtails new demand, according to four Harvard University scholars (quoted in a Bloomberg report).
Led by Edward Glaeser, the scholars noted that home prices are resilient partly because buyers are not in any major debt. Investing for the long term, said buyers are unlikely to dispose of their homes or have them repossessed, despite a drop in prices.
Leveraged developers also enjoy good relationships with state banks; as such, their loans can be restructured even if pressured, they said in an October working paper published by the National Bureau of Economic Research.
China’s central bank is walking a tightrope as it struggles to address skyrocketing home prices. Last week, it vowed to curb asset bubbles, while ensuring enough liquidity to support a growth target of at least 6.5 percent. Controlling new home supply risks undermining plans to urbanise 100 million Chinese rural citizens by 2020.
“There does appear to be a feasible path towards price stability,” said the scholars. “The demand for urbanisation in China is so large that if the government acts to sharply restrict new supply, it can probably maintain prices at close to current market levels. If the government buys up excess inventory, perhaps to convert it to social housing as it has started to do in 2015, it can further bolster softening prices.”
The stability path, however, comes with significant social costs. China will lose the increased productivity that comes with residents moving from rural areas to cities, and construction employment will drop. Furthermore, a clampdown on new home supply would see local governments losing the financial autonomy they have achieved from land taxes and sales, they said.
From 2003 to 2014, 100 billion sq ft of residential property was built in China, amounting to approximately 74 sq ft per person, while the average price of a 90 sq m home in Beijing and Shanghai this year is about 25 times the average household income. The stock of vacant homes nationwide stands at around 20 billion sq ft, 2.5 times the size of New York City.
The scholars noted that the building spree was especially rampant in second- and third-tier cities. In fact, the inventory of homes in third-tier cities soared to 3.45 billion sq ft in 2015, from 940 million sq ft in 2011.
“In many respects, China looks like a classic housing bubble,” they said. “Prices have soared. New construction is enormous. Vacancies are large and pervasive. It is tempting to view these events from afar and conclude that a price drop is imminent.”
However, they believe such a scenario is “far from certain”.
Cheryl Marie Tay, Senior Journalist at PropertyGuru, edited this story. To contact her about this or other stories, email cheryl@propertyguru.com.sg
