Is the ice thawing and
spring returning to China’s housing market? Investors have recently dared to
ask this question.
The recent interest rate
cuts and Premier Wen Jiabao’s words re-emphasizing “stable growth” have led the
market to wonder if the Chinese state has changed its policies for controlling
the housing bubble.
Moreover, in a few
cities, housing prices and sales volumes either stopped declining or picked up
in the last couple of months.
Nonetheless, the facts
don’t support optimism about the housing market at this time.
First, even though the
decelerating economic growth has forced the People’s Bank of China to cut
interest rates on June 8, the Chinese state seems to be firm about its housing
control strategy.
Within 10 days in mid-June,
four ministries (Ministry of Housing and Urban-Rural Development, National
Development and Reform Commission, People’s Bank of China, and China Banking
Regulatory Commission) independently made public announcements to stop the
rumors about easing the controls on the housing market.
Second, for the country
as a whole, the downward trend has been continuing since October 2011. Among
the 70 large and medium cities that the National Bureau of Statistics follows,
housing prices declined in 55 cities in May, compared to 12 months ago.
Third, in the largest
cities, housing prices are just too high by any measure. In many cities,
including Beijing and Shanghai, price-to-income ratios are around 30-to-1,
almost twice as much as Japan’s 16-to-1 when its housing bubble burst in 1990.
In the United States, the housing price-income ratio was only 3.3-to-1 in 2011,
and even in Q4 2005 at the peak of the housing bubble, it was just 5.1-to-1.
Fourth, vacancy rates in
China have been well above the normal range of 5 to 10 percent in advanced
countries. Several survey studies in Beijing, Zhengzhou, and Hangzhou show that
vacancy rates are around 30 percent.
On March 31, the Beijing Municipal
Public Security Bureau published a report of a 100-day population investigation
project. It says that in Beijing, 3.8 million housing units, out of the
existing 13.2 million housing stock, are vacant. Beijing’s vacancy rate is 28.9
percent.
Professors Zhang Jingqiu
and Meng Bing of Beijing Union University made an investigation in over
Beijing’s 50 district areas and found 27.2 percent of housing units did not use
any electricity for more than half a year.
In 2010, 12 college
students spent two months visiting 11,000 housing units in six district areas
in the city of Zhengzhou. They found one newly developed area had a vacancy
rate over 55 percent, while the other five district areas had vacancy rates all
above 20 percent.
In sum, the correction in
China’s housing market will continue, and the soaring prices in Beijing,
Shanghai, and the other largest cities will drop significantly. It is only a
matter of time. A hard landing will speed up this process.