Shenzhen Tops List of China’s Riskiest Housing Markets

Shenzhen’s real estate market has drawn global interest in the last year for the more than 40 percent increase in the cost of new homes in the city, following a major rebound in China’s housing market.

Now the southern Chinese metropolis is drawing some less welcome attention after a top Beijing think tank crowned Shenzhen as the nation’s riskiest housing market.

A study published this week by the Chinese Academy of Social Sciences (CASS) calculated risk in 35 major mainland cities, and found that Shenzhen edged out Xiamen in Fujian province, and Shanghai, which finished second and third respectively among the markets most at risk of suffering a decline in home prices.

Housing Prices Out of Line with Market Fundamentals

The report by the National Academy of Economic Strategy at CASS, together with the research body’s City and Competitiveness Research Center compared housing prices to household income, as well as to average rental prices, to identify markets likely to be out of synch with real estate market fundamentals.

China’s property industry has run through increasingly sharp cycles of boom and bust in recent years as consumers struggle to find alternative investment opportunities. This struggle for yield among Chinese consumers comes as the government continues to stoke economic growth by increasing liquidity and encouraging borrowing.

While Shenzhen benefits from a robust high tech sector, the city’s 42 percent increase in home prices from July 2015 to July 2016 puts it firmly into the think tank’s danger zone for a potential decline. Already home prices in the city just across the border from Hong Kong have declined in the last few months, so that average prices in October were only 32 percent over the price paid during the same month in 2015. Shanghai’s average home price in October was 31 percent higher than it was during the same month last year.

Market Expected to Level Off in 2017

A recent raft of home purchase restrictions in many of China’s largest cities has attempted to clamp down on real estate speculation by discouraging investment in second and third homes, leading many analysts to project slower price growth in 2017, with the possibility of a market decline in some of the frothier cities.

“The domestic housing market will in general cool and stabilize in 2017 accompanied by a new round of short-term correction,” Ni Pengfei, director of CASS’ City and Competitiveness Research Center said in a statement. The social scientist added that, “The correction may last for about one year, and we will probably see diversified and polarized performances among the cities.”

CASS is an organ of China’s central government, and its reports are often in line with official points of view.

During China’s most recent market slide during 2014 and into 2015, second tier cities such as Hangzhou, in Zhejiang and Changzhou in Jiangsu province saw home prices slide by as much as 30 percent, and transaction volumes slowed to a trickle. That market slowdown also followed several rounds of home purchase restrictions which had been imposed by the government to tame an earlier bubble.

While Shenzhen and Shanghai have now been singled out as dangerous cases, during the previous downturn China’s first tier markets, which include both of those cities as well as Beijing and Guangzhou, saw little if any drop in home prices.