In 2014 analysts seem to have as many opinions on the future of China’s real estate market as the country’s government had home purchase restrictions in 2011.
With government and private surveys showing home prices sliding nationwide for at least the last three months, and policy changes seeming to have little effect, investors seem eager for industry pundits to tell them how far prices might drop, and how quickly the market may rebound.
Last week the head of one of China’s leading government-sponsored property think tanks weighed in on the issue, and according to Qin Hong, Head of the Center for Policy Research at the Ministry of Housing and Urban-Rural Development, while the current slide is simply part of a normal cycle, investors accustomed to steadily rising values should be ready for a “new normal” in the real estate market that includes more ups and downs.
Other analysts, including economists from global investment banks, see the downturn as a sign of a more serious economic shift.
Demographics Will Save the Day
In defending the long-term health of China’s property market, Qin pointed to favorable macroeconomic factors including a high rate of savings and favorable demographics.
The economist noted that the savings rate of Chinese people remains at historically high levels, and that a large wave of people born in the 1980s still need housing and will help support demand.
2010 Shortage Created 2014 Housing Surplus
As for the current slide in housing prices, which even official government statistics recognize as having declined for the last three months, Qin believes the problem is caused by a cyclical glut and easy credit.
According to her analysis, a shortage of housing in 2010, and an excess of liquidity in the years after helped to spur a surge in new projects, which has created the current oversupply of new housing. She also indicated that excessive local government dependence on land sales revenues played a role in stoking the cycle.
Now the large inventories of unsold homes are naturally bringing prices down.
A New Pattern of Volatility
Qin sees the shortage and slowdown cycle as part of a new phase in the development of China’s real estate market.
“Over the past ten years the real estate market has generally gone up in cities both large and small, however, the past decade of development will be hard to replicate,” Qin was quoted as saying in the local press.
“In markets around the world, volatility is the norm, and now that China’s property sector has grown to this scale, we can expect such fluctuations to be normal,” she added.
Other Analysts See Bigger Changes
Qin’s remarks were more sanguine than some other economists, who in light of a series of discouraging July economic news, believe that the real estate market may be in for deeper change.
After July data showed a steep drop in lending and HSBC’s Flash PMI had its worst reading in three months, some economists believe that China will struggle to rekindle its economy, and a last slump in the property sector could be a drag on overall GDP growth.
In a note to investors last week UBS chief economist Wang Tao said that despite any potential short term improvements, the current real estate downturn marks “a structural inflection point.” In Wang’s view, government policies may slow, but “cannot reverse the downward trend in the industry.”
Goldman Sachs economist Li Cui also sounded pessimistic about the current macroeconomic situation, pointing out that “long-term investment has continued to decelerate despite monetary easing.”
If the government is unable to spark the economy by easing up on credit markets, including lending to the real estate sector, then the property market – and the economy as a whole – could be in for longer downturn than Qin and the Ministry of Housing and Urban-Rural Development currently anticipate.