You might have read my previous blog post on the Ghost Cities of China where 10 new cities are built each year but are nearly all empty. Reading in the FT, the Chinese property market faces a dilemma it that although property prices in cities are beyond the reach of the majority of the population, in the rural areas where the vast majority of the population still live, property prices have dropped significantly. With the lower prices developers are now less likely to build anymore houses. In the past the government has intervened so as to avoid a US style sub-prime type bubble situation but should it worry more about high prices in big cities or weak construction in the rural areas?
The key questions for Chinese policy makers are as follows:
1. Should it regulate house prices in cities which account for 25% of the market which will have an impact on prices outside cities?
2. Can the Chinese economy afford to have house prices to drop as property construction has accounted for around 15% of GDP in China?
With this potential loss of GDP the government has been making it easier for potential homebuyers to borrow money – see affordability index. Banks have given special offers for first home buyers and there has been pressure on contractors to build more economical houses.
House Price-to-Income Ratio
This ratio gives an indication of the affordability of housing. In China this is 7:1 as compared to most developed countries being 4:1. However in cities the ratio is much higher for example:
Shanghai – 12:1
Beijing – 11:1
Shenzen – 16:1
This makes it very hard for people to take a step on the property ladder. But even in some cities where the house price-to-income ratio is much lower – around 7:1 – house sales have not recovered that much. The main reason for this is the government’s home purchase rule which restricts consumers from buying a second home. Furthermore there is a tendency for potential buyers to now wait for prices to fall.
The Chinese authorities might find that it is just too hard to reduce prices in the cities at same time trying to increase construction in the rural areas.