China house prices rebound — how come?
September 18, 2015
Rafael Halpin
Data published on Friday by China’s National Bureau of Statistics have shown a further rise in home prices in the country.
The recovery has taken the market by surprise, after many predicted last year that China’s housing market was on an irreversible downward trend.
What is going on?
One often-cited reason for the rebound is that investors are switching from equities to housing as China’s stock market bubble deflates.
But there is little evidence of this.
Seventeen per cent of consumers surveyed by FT Confidential Research in August said they planned to invest in real estate in coming months, still well below the 41 per cent planning to buy stocks.
Only 20 per cent of consumers in August thought that now was a good time to buy a house for investment purposes.
Some observers say the uptick in home prices is happening only in larger Chinese cities. But while it is certainly true that first-tier cities have led the upturn, there are indisputable signs of recovery in smaller cities as well.
Outside of provincial capitals and municipalities, the average price of residential floor space sold has risen 2 per cent year on year so far in 2015, according to the NBS.
Data from Soufun, a real estate consultancy, show a similar trend.
So what is driving the recovery in home prices?
Analysis from FT Confidential Research suggests that the main factor is an undersupplied housing market: demand is recovering at a faster pace than supply is being increased.
One stark indication of this is that while residential floor space sold rose 8 per cent year on year in the first eight months of 2015, the amount of floor space completed fell 17 per cent, according to the NBS.
Undersupply, measured by the gap between space completed and space sold, is on the rise
Another indication is that housing inventories are now being rapidly drawn down.
Residential floor space available for sale — including units being sold off-plan — fell to the equivalent of 10.3 months of sales in August in the 10 cities tracked by FT Confidential Research, the lowest level since March 2014.
Home price growth has recovered in tandem with both of these indications of undersupply.
The sharp rise in home prices is ultimately testament to the fact that China needs to build more houses, an important counterpoint to the doom and gloom over China in recent months.
Developers generally take about six months to respond to higher home prices and start construction on new projects, something that in the past has supported the wider economy by boosting demand for industrial goods.
With home prices now firmly on an upward trend, inventories moderating and credit becoming cheaper and more readily available, there may be ground for taking a more optimistic view on China’s prospects for the rest of the year.