Francisco A. Laguna & James K. Bates
As a follow-up to our last China post, today, we focus on the real property sector. With relatively few opportunities for in-country investment, the Chinese have focused on real estate as a preferred private investment. Increasing personal prosperity, combined with government-allowed home ownership, has fueled real estate prices to surreal levels in cities across China.
In 2010, the Chinese government took steps to deflate property values by imposing control measures, including increasing the minimum down payments required for mortgages and limiting access to loans. However, mid-2012, Beijing relaxed some of these restrictions, reversing course to bolster the economy. The government sought to stimulate the housing market by implementing measures that made loans available to first-time buyers and those who wanted to purchase better homes.
Polituburo policies succeeded in reigniting the Chinese real estate market:
- In December 2012, 54 of 70 cities surveyed by the National Bureau of Statistics reported a rise in the price of newly-constructed homes
- In 2012, investment in property development / construction rose by 16.2 to 7.18 trillion yuan (~ US$ 1.15 trillion)
- In 2012, residential property sales rose 10.9%, and by increased floor area, sales went up 1.8%
- 2013 sales are expected to exceed 1.2 billion square meters (12.9 billion square feet).
Developers were able to sell inventory, which required them to purchase new real estate for future projects.
The government is well aware of real estate’s important role in the Chinese economy. According to the International Monetary Fund, the sector makes up 12% of the economy. Adding in construction- and home-related spending on building materials, appliances and furnishings, that figure increases substantially. The other major sectors include the government’s own investment spending and manufacturing. As the population matures and the younger generation becomes better educated, manufacturing is likely to decline. This places pressure on the government to strengthen other segments, including retail, services and research & development to create a balanced economy, rather than one largely dependent on one branch.
As prices recover and then some, the Party is also mindful of potential civil unrest and criticism of the regime as values continue to increase and only certain echelons of society can afford to live in the luxury complexes popping up across China. The people’s awareness of, and reaction to, the economic divide is of concern to the Politburo. Again, they have something to worry about. Average urban income was 24,565 yuan (US$ 3,947) in 2012. In Beijing alone, average home prices were 20,700 yuan (US $ 3,326) per square meter. Pricier real estate fetches 160,000 yuan (US$ 25,706) per square meter – values that rival or surpass many major capital cities.
The pundits are divided on whether the Chinese real estate sector can sustain these levels. Bullish observers expect increased prices and stronger markets, provided government policies remain favorable. Others point to the fact that the upward trend was not felt across China and declining heavy construction equipment sales belie weakening of the sector. It will be interesting to see how Xi Jinping maneuvers the situation and how the people will react to the realization that home ownership may only be for the select few.