Headlines Hide the Reality of China’s Property Sector Resilience

 

Second only to China’s banking sector, property is a major area of discussion among investors, and of course the two sectors are strongly linked.

Major demographic, urbanisation and social trends also shape demand for and use of real estate. The population of Shanghai has risen from 15 million in 2010 to 25 million today, and this growth trend is evident across hundreds of cities.

China’s population is aging rapidly. The percentage of those in the marrying age cohort (20-29) peaked around 2006. More babies are needed, but it seems that sex has been superceded by online shopping: despite the relaxation of the state’s One Child policy, the birth rate is static.

There were twelve million marriages last year, but the institution is in decline, falling by 4% in 2014, and 7% in 2015. Newly marrieds nearly always buy a property, since living together when unmarried is still frowned upon.

A great deal of gloom regularly attends the property sector. Headlines about “ghost cities” have dominated the news for as long as we can remember, although, as is so often the case, there is a strong element of sensationalism.

Some of the problems have been of the government’s making. A number of restrictions on home ownership were introduced in 2013, such as higher deposits, and limits on second home purchases, when the sector was perceived to be overheating. Prices corrected sharply in all areas, but particularly in Tier 1 cities, where appreciation had been the most rapid.

In the last year many of these restrictions have been lifted, with beneficial consequences in all areas, but especially the Tier 1 and 2 cities. The areas of greatest concern are the Tier 3 cities. These are geographically remote and often dependent on heavy industries in the state sector, such as steel, cement or petrochemicals.

Unsurprisingly, given overcapacity in most of these sectors, and the ongoing reform of State Owned Enterprises (SOEs), unemployment has been rising, incomes have been flat or falling, and these cities have become unpopular places in which to live. It is hard to see this trend reversing any time soon.

But from a government perspective, stability in the property market matters greatly. Property accounts for about 60% of the average family’s assets, (cash is 20%, and stock market investments a mere 6%), and property stability is therefore extremely important to the average urban middle class family. A property implosion could have very adverse political consequences, which is in nobody’s short term interests.

China’s reform of its Hukou system is helping. This is an ID card entitling the holder to residency and services in any large town or city. Historically it has been difficult to obtain for people who want to move in from the countryside. However, many towns and cities now offer equal access to incomers, and those buying a flat with a mortgage are usually entitled to a Hukou. Local governments find this a convenient way of clearing inventories of unsold properties.

This combination of circumstances has meant that property sales volumes have risen by a strong 36% in the first quarter, led by Tier 1 and Tier 2 city locations. Tier 3 cities are a little better than last year, but their recovery is anaemic. Overall the mix of buyers is quite healthy too, with the majority of purchases being made by first time buyers and upgraders. Investors are said to account for a mere 5%-10%, indicating that there is little or no speculation.

The property sector is also benefitting from state measures to avoid a sustained economic slowdown and help protect the banking system. The government has injected extra liquidity into the markets by reducing interest rates and reserve ratio requirements, and easing up on the pace of SOE reform. This has worked relatively well, although it seems that generating 1% of GDP now requires an extra 4% of credit, compared to around 1.5% pre-2008.

GDP is now expanding at 6%-7% and around 3.2 million new jobs have been created this year. The overall conclusion seems to be that contrary to those sensationalist headlines, China’s property sector is in reasonable shape.

 

This article is specifically provided for use by media representatives in the UK. The views expressed are those of the fund manager at the time of writing, and may have since changed.

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