Policy to provide temporary relief from property heat in China

" More cities and counties will join in the property tightening initiative going forward."
Raymond Yeung & Betty Wang, Chief Economist Greater China & Senior China Economist, ANZ

In 2016 Chinese policymakers began to tighten the property market with many cities implementing demand-side measures such as purchase restrictions and higher down-payment requirements. However, the impact of these measures has proven to be short lived.

Of the 70 cities tracked by the National Bureau of Statistics (NBS), the number of cities which reported monthly price hikes rose to 56 in February this year from 46 in December 2016.

In addition, fixed asset investment (FAI) in the property sector increased 8.9 per cent in the first two months of 2017, accelerating from 6.9 per cent in 2016.

… AND NEW MEASURES ARE SIMPLY INCREASING THE DOSAGE

Against such a backdrop, more than 20 cities have announced city-specific property tightening measures since early March.

The launch of tightening measures in lower tier cities suggests demand for property is no longer limited to top tier cities. Since the central government has established a strong policy tone to regulate the real estate market at the Central Economic Work Conference in December 2016, ANZ Research believes more cities and even counties will join in the property tightening initiative going forward.

However, city-specific and regulatory tightening measures, especially those that aim at containing demand, can only temporarily cool a red hot property market but not fundamentally resolve structural issues.

HOUSING INVENTORY WILL CONTINUE TO DECLINE

The reality is nationwide property inventory levels  continued to decrease despite the 2016 tightening measures, according to ANZ Research. In terms of floor space, the absolute level of inventory dropped to 3.27 billion square metres at end 2016 from 3.48 billion square metres in 2015.

However, when we take a more detailed look at provincial data, inventory conditions vary amongst different regions. Contrary to common perception, the destocking process in central provinces has outperformed that in the eastern provinces where most top tier cities are located.

Compared to other regions, the central provinces have the shortest cycle of about 2.3 years while north-eastern and western regions still suffered from high inventory levels which require three to four years to digest.

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Nonetheless, our projection suggests China’s destocking process will continue. The property tightening measures introduced in 2016 had quickly led to a sharp decline in transaction growth to 7.7 per cent in November from 26 per cent in October, although it rebounded to 23.7 per cent over the first two months of 2017.

Assuming the current round of tightening will substantially slow the growth in property transactions to 7.7 per cent for the rest of 2017, the inventory turnover rate will still decrease, albeit at a slower rate, to reach 2.1 years by end-2018, a level last seen in 2012 when the property market was in a downturn.

However, we do not think China’s property prices will decline sharply.

Raymond Yeung is Chief Economist Greater China & Betty Wang is Senior China Economist at ANZ