Are We Seeing a Chinese Property Revival?

November 9, 2015 10:56 am Last Updated: December 31, 2015 3:35 pm

Most China watchers are focusing on the stock market and the currency these days. 

Is the stock market’s rally going to last? Will the International Monetary Fund accept China in its reserve currency basket? In the meantime they are missing a revival in the Chinese real estate sector.

In the last week of October, new home transactions soared 7.55 percent compared to the same period last year (measured in square meters), according to research firm JL Warren Capital.

And previously owned home transactions even went through the roof: They are up 51.2 percent over the year.

“In Q3, the mainland residential market picked up gradually amid a series of favourable policies. Luxury home prices gained further in Beijing, Shanghai, and Guangzhou, where the markets continued to clear inventories,” Knight Frank, a real estate research firm wrote in a report.

Policies have indeed been favorable after the real estate bubble started bursting in 2014. 

A comparison between U.S. and Chinese house prices, rebased to the respective beginning of the decline. (Fathom Consulting)
A comparison between U.S. and Chinese house prices, rebased to the respective beginning of the decline. (Fathom Consulting)

The People’s Bank of China cut interest rates six times this year but also dramatically eased housing policies, relaxing the urban registration system and lowering the amount of money needed as downpayment.  

So with the stock market out of favor, some of these easy money policies had to work. 

“Grade-A office prices in Beijing, Shanghai, and Guangzhou rose as investing in such properties became increasingly attractive in such a low interest-rate environment,” wrote Knight Frank.

However, first- and second-tier cities are the only beneficiaries of the uptick.

“The widening sales gap between the top 35 cities and the rest of China, where turnover is much lower and prices are soft, is driving developers to crowd into tier one and some tier two cities (again) and bid up the land prices disproportionately,” it says in the note by JL Warren Capital. 

What’s worse, the rising prices won’t have a positive impact on growth, according to JL Warren, “Home sales prices, on the other hand, although rising in those cities, by no means keep up with the rise of land prices. That explains why new home starts are falling and residential housing construction will not drive GDP growth in 2016.”