Chinese property prices are now bouncing back, amidst central bank’s decision to slash its key interest rates to boost the slowing economy.

In July 2012, the average house price in the 100 Chinese cities surveyed rose by 0.33% to CNY8,717 (US$1,377) per square meter (sq. m.) from the previous month, the second monthly rise after eight consecutive months of declines, based on figures released by China Real Estate Index System (CREIS).  On an annual basis, house prices were still down by 1.77% in July 2012.

In China’s top 10 cities (including Beijing and Shanghai), the average house price rose by 0.27% m-o-m but was down 2.32% year-o-year in July 2012, according to CREIS.

Property prices in China rose rapidly from 2000 to 2008, fuelled by low interest rates and cheap credit. The price index for second-hand homes in Shanghai soared 121% (85% inflation-adjusted) from Q1 2003 to Q2 2008, based on data published by Ehomeday.
Residential property investment in China has tripled from 2% of GDP in 2000 to 6% of GDP in 2011. Real estate and property construction in the country currently accounts for around 11% of GDP, according to GK Dragonomics.

As skyrocketing house prices triggered public complaints, the government started a massive public housing program last year. In 2012, the government allocated more than 20,000 hectares of land for low-income housing, according to the Ministry of Land and Resources. In 2011, it started the construction of 10 million units. The government vowed to build 36 million affordable housing units until 2015.

In addition, the government introduced market-cooling measures in April 2010. The campaign intensified in 2011.

• The down payment for first-time buyers’ mortgages was increased to 30% from 20%, while for second homes down payment rose to 60% from 50%.
• Mortgages for third home purchases were prohibited. 
• There were limitations on home purchases in more areas, credit-quota limits and higher benchmark lending rates.
• New property taxes were introduced in Shanghai and Chongqing – between 0.4% and 0.6% in Shanghai, and between 0.5% and 1.2% on luxury homes and newly purchased high-end homes in Chongqing, plus a special tax on second home purchases by people with no business or employment interest in the city.
• In early-2011, Beijing also banned property purchase to those who have not lived in the province for five years, limited the number of homes a native Beijing family could own to two, and allowed only one home for non-native Beijing families.
• Mortgage discount for first-time homebuyers was eliminated.
• The benchmark interest rate was raised to 6.56% in July 2011, the third interest rate hike last year.

As a result, house prices started to decline in the last quarter of 2011.

However, the government is now reversing its policies in an effort to boost the slowing economy.  The People’s Bank of China (PBOC), the country’s central bank, slashed its key lending rate to 6% in July 2012, the second rate cut since the beginning of 2012. In Beijing, the local government also cut bank’s reserve requirement ratio (RRR) in November 2011 to free up about CNY1.2 trillion (US$191 billion) for lending.

With these pro-growth policies, the housing market has been rebounding the past few months.
Aside from the noticeable increase in house prices in recent months, total property sales rose by 6.9% in June 2012 from the same month last year, the first gain this year. In Beijing, home sales also soared 50.6% y-o-y to 25,602 units in June 2012.  This is supported by a separate report conducted by Standard Chartered, which showed that sales of apartments in China’s largest cities have started to increase in Q2 2012.

The total floor area of housing units sold fell by 3.3% y-o-y in June 2012, but this is a significant improvement from a 9.3% y-o-y drop seen in May 2012, according to the National Bureau of Statistics of China (NBSC).

However, the construction sector is still weak. New housing starts in the first half of the year dropped 9.8% from the same period last year, according to the NBSC. Over the same period, land bought by developers also fell 24.3%.

During the year to Q2 2012, the Chinese economy expanded by 7.6%, the lowest growth in three years. Real GDP growth is expected at 8.2% in 2012.  The Chinese economy expanded by 9.2% in 2011, from annual GDP growth rates of 10.4% in 2010 and 9.2% in 2009.

China’s mild economic slowdown

During the year to Q2 2012, the Chinese economy expanded by 7.6%, the lowest growth in three years, due to sluggish external and domestic demand, as well as the government´s efforts to cool the property market. From an average growth rate of 12.7% annually from 2005 to 2007, China has experienced a mild slowdown in recent years, with an average annual real GDP growth rate of 9.6% from 2008 to 2011.

Barclays Capital projects 7.9% GDP growth in 2012, less optimistic than World Bank and the IMF which both predict the Chinese economy will expand by 8.2% in 2012.

To boost the economy, the Chinese government has recently implemented growth-spurring measures, which include the following:

• The central bank has lowered the bank reserve requirements ratio (RRR) three times since November 2011
• The central bank has slashed the benchmark interest rates twice this year
• The government subsidizes energy-saving household electrical appliances
• Approvals for major construction projects have been speed up
• Sixteen provincial-level regions had raised their minimum wage rate, with an average increase of 19.7% in June from a year earlier. 

Annual inflation eased to 1.8% in July 2012, the lowest rate in 30 months, according to the National Bureau of Statistics of China.  In the second quarter of 2012, China’s urban unemployment rate stood at 4.1%, unchanged for the eight consecutive quarters, according to the Ministry of Human Resources and Social Security (MOHRSS). However unemployment is expected to rise in the coming months, as a record 7 million college graduates enter the workforce.

Previous pump-priming measures

Housing sales and property prices began to rise in China in H1 2009, boosted in November 2008 by a CNY4 trillion (US$585 billion) post-financial crisis stimulus package. Buyers took advantage of looser lending conditions and lower interest rates. Developers were able to easily get loans with the lowered capital requirements.

The package included reducing the property deed tax rate for first-time home buyers of small apartments to 1% from 1.5% (January 2009 to December 2009), introducing stamp duty and land value-added tax exemptions, and exempting sellers of residential property from the 5.5% business tax, if sold after more than two years.

Transactions strongly down in Beijing

In H1 2011, transactions of high-end units dropped by 42.6% y-o-y and 12.5% q-o-q according to Jones Lang LaSalle.

There was a 50% q-o-q decline in transaction volumes of forward delivery housing, according to the Beijing Municipal Bureau of Statistics, while the volume of existing houses sold was projected to drop by over 60% q-o-q in Q2 2011.

Shanghai: housing restrictions bite

The Shanghai secondary housing market has also slowed, rising by a monthly average of only 0.04% (-0.87% in real terms) from July 2011 to September 2011. The monthly average dropped by 0.19% in November, according to data from ehomeday, Shanghai’s largest housing information portal.

According to Colliers International, new home sales in Shanghai rose despite the sluggish housing market in August 2011. However, the average transaction price slipped by 1.73% y-o-y to CNY 20,524 (US$3,227.19) per sq. m.

Decelerating mortgage market|

In Q2 2011, outstanding mortgage loans rose annually by 17.5% to CNY 6.26 trillion (US$98 billion), according to the People’s Bank of China (PBOC). However, this the 14th consecutive month of decline in growth.

The deceleration is significant only perhaps by contrast with the strong mortgage market conditions of 2 years ago, in 2009, when outstanding home loans rose by 59.73%.

In 2010, the government laid down a new lending official target of CNY 7.5 trillion (US $1.1 trillion). The banks’ total loans in 2011 are expected to be around CNY 6 trillion to CNY 7 trillion. Measures such as higher bank lending rates or large supplemental fees have been widely adopted by banks. Some even suspended approving mortgage loans altogether.

China’s mortgage market remains small, with a 15.6% ratio of home mortgage loans to GDP.

Factors hindering mortgage market growth:

• Mortgage lending dominated by state-owned commercial banks.
• Banks prefer to offer loans for new housing. The mortgage market for old housing is undeveloped.
• A mismatch between property registration and mortgage policies.
• Banks put lean on real estate developers when buyers default on loans.

The mortgage market is led by four major state-owned commercial banks namely: Bank of China, China Agriculture Bank, China Construction Bank and Industrial and Commercial Bank of China.

Tighter lending conditions

In response to the PBOC’s base rate rises, interest rates on home loans have increased steadily. In June 2011, the weighted average interest rate of home loans was at 6.83%, up by 0.66 percentage points than in March. By October 2011, there were reports some banks in 14 cities, including Shenzhen, Guangzhou and Shanghai, had raised their mortgage moan rates by 5%, to 30%.

Following the upward trend, interest rates for Housing Provident Fund (HPF) loans increased by 0.2 percentage points to 4.9% in July 2011, from 4.7%. The HPF encourages workers to save a portion of their income to buy residential properties. Similar to Singapore’s scheme, when an employee registers with the HPF, the employer opens a bank account under the name of the employee. The employee contributes 5% of his monthly salary and the employer deposits the same amount. Employees can’t withdraw unless they retire, pass away, or leave, but can use the funds to purchase residential properties at below market rate loans from state-owned banks. Government employees and employees of state-owned enterprises must take part, while private sector employees have the option. As of 2007, an estimated 100 million workers were registered.

Rental yields remain low

The rental market in China is heavily regulated, and the system favours the landlord. The landlord is may get large payments for breaches of contract committed by the tenant. Although major cities have no rent controls, other smaller cities may have.

In February 2011, rental yields in some major Chinese cities were between 1.9% and 4%, according to Global Property Guide research. Chengdu was an exception, having healthy yields ranging from 5.2% to 7.5%, with higher yields on larger apartments. Guangzhou and Shenzhen have lower average yields of 3.17% and 2.88%, respectively.

In Shanghai, average ordinary apartment yields were 2.92% while luxurious apartments had average yields of 2.63%. The lowest average yield was in Beijing, at 2.22%.

This year (2011), the government has allocated CNY 103 billion (US$15.6 billion) in its budget for the subsidies to support the development public rental housing, CNY 26.5 billion higher than in 2010.