Divorces highlight China’s property puzzle

Posted on September 4, 2016

Workers operate on a large construction site for new residential housing in Yulin, Shaanxi Province, China on 14 August 2011.©Bloomberg

A divorce registration office is not a typical place to seek clues about demand for real estate. Then again, China’s is not a typical real estate market.

The divorce office in Shanghai’s Xuhui district was overwhelmed with happily married couples on Monday. For the previous week, rumours had circulated that starting from September, the government was about to impose a 70 per cent downpayment requirement for mortgages, from which unmarried homebuyers would be exempt.

    Local media described a flow of new divorcees holding hands as they exited the office. Though the office normally operates until 4:30pm, the registrar abruptly closed its doors at 4pm, posting a notice attributing the closure to “numerous” applicants. Shanghai home sales rose 93 per cent in floor area terms for the week ending August 28, compared with the previous week. The Shanghai government has denied that it is considering new mortgage restrictions. 

    China’s housing market is now deeply bifurcated. Flats in Beijing, Shanghai and Shenzhen are now seen as reliable stores of value that are largely immune from macroeconomic trends and cyclical dynamics in the broader property market, but the nationwide outlook is cloudier.

    “For top cities, whatever you do, the price goes up. You tighten, it goes up. You loosen, and of course it will go up,” said Rosalea Yao, property analyst at Gavekal-Dragonomics, a Beijing-based economic consultancy. “The market doesn’t believe that tightening measures are effective. On the contrary, they create more volatility.” 

    A flood of new credit early in 2016 was key to the housing price rally. Home mortgages accounted for more than half of all new loans by the country’s big commercial banks in the first half of 2016, and overall mortgage lending hit a record in June. 

    Now, however, authorities have signalled their intention to shift towards deleveraging. A politburo meeting in late July highlighted the risk of asset bubbles, and overall credit growth in July was the slowest in two years. 

    Based on prices alone, the nationwide property rally appears still to be gathering steam. Following 13 straight months of annual declines, price growth turned positive in October 2015. Since then, growth has accelerated every month, reaching 7.9 per cent in July, according to Reuters’ national calculation based on the government’s 70-city survey. 

    But construction activity by developers, which generates demand for factory output such as steel, cement, and base metals, shows a different picture. Property investment growth has decelerated for fourth straight months to 5.3 per cent in July.

    Third- and fourth-tier cities continue to struggle under a large inventory of unsold flats. The number of unsold new homes in 35 major cities has fallen by 5.6 per cent in July in floor area terms from a year earlier, according to E-House China R&D Institute. But many small cities had more than two years’ worth of new inventory as of late last year. 

    “In a lot of these cities, the local economy is very simple, and now they’re going through consolidation,” said Albert Lau, China chief executive of Savills, a global realtor. “If the whole town relies on manufacturing shoes, that limits the ability to digest the housing stock.”

    Despite the recent denials by Shanghai, most analysts expect local governments in big cities to impose further purchase restrictions and higher mortgages downpayment requirements in the coming months. Xiamen, a coastal city in east China’s wealthy Fujian province, said last week it would ban non-residents from buying second homes, while residents will be limited to two. 

    The divergence between large and small cities is causing headaches for the People’s Bank of China, the central bank. Further policy loosening would risk exacerbating the bubble in big cities, but looser credit conditions are still needed in smaller cities. 

    “At this moment, the property sector is the most important factor in monetary policymaking,” Larry Hu, China economist at Macquarie Securities in Hong Kong, said in a note. “The PBoC refuses to cut interest rates or (required reserve ratio), due to the concerns on housing frenzy in high-tier cities.”

    Twitter: @gabewildau

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