Easing China’s Housing Bubble Has Unintended Side Effects

  • Beijing, Shanghai help chill rust-belt cities of Jilin, Harbin
  • Smaller cities suffer housing gluts, no frenzied speculation

Residential buildings stand in Beijing, China on Friday, Nov. 25, 2016.

Photographer: Qilai Shen/Bloomberg

In China’s two-speed property market, prescriptions for deflating big-city bubbles are having unintended side-effects in smaller towns.

Soaring prices in megacities Beijing and Shanghai both snapped 20 months of gains in November after authorities tightened restrictions to reduce excessive speculation. Meanwhile, real estate in the northwestern rust belt cities of Jilin and Harbin also declined, posting their first drops in four months.

Signs that prices stopped rising is good news for major cities as it shows policies are having the desired effect, but they’re less welcome in smaller towns still battling to fill millions of empty homes that weigh on prices. That disparity poses a new challenge for policy makers just as they pledge to ensure stability and step up the fight against speculation.

"China’s property market has complicated, structural problems," said Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing. "Bubbles in big cities have much to do with financial leverage, whereas oversupply in third- and fourth-tier cities epitomizes the lukewarm economy."

Prices gained in November from the previous month in 55 of the 70 cities tracked by the government. They fell in 11 cities, six of which were in mid-sized markets that haven’t added any purchase restrictions and are still dealing with big surpluses of empty homes.

Inner Mongolia’s Hohhot, the northwestern industrial hub of Lanzhou and the southwestern tourism magnet Guilin also slumped, National Bureau of Statistics data showed this month.

For this year, Hohhot prices are up 1.1 percent, while Lanzhou’s have gained 3.6 percent. Beijing and Shanghai, meanwhile, both have surged more than 20 percent in 2016.

Boosting sentiment in smaller cities while trying to keep a lid on the froth in bigger ones is very difficult as major markets often function as a bellwether for those down-market, according to Alan Jin, a property analyst at Mizuho Securities Asia Ltd. in Hong Kong.

“They share the same sentiment and the same liquidity situation,” Jin said. “It’s impossible for any city to be immune to tightening. I’ve never seen any.”

Officials outside of the red-hot markets confront more ghost towns than bubbles. China has 13 million empty homes and continues to add to excess supply at a rate of 2 million units a year, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik.

"China’s real estate market is massively oversupplied," they wrote in a recent report. "Worse, in the years ahead, demand is set to slow. The one-child policy has already crimped natural growth of the urban population. Rural-to-urban migration is ebbing as the supply of surplus rural workers is used up."

The housing boom has largely been fueled by surging liquidity amid a two-year easing cycle by the People’s Bank of China, which is keeping its benchmark interest rate at a record low. Cheap credit has flowed to property in top-tier cities, but less has found its way to real estate in less-populated areas.

Bubbles and Surplus

Unsustainable prices and excess inventory co-exist in China’s property markets, and more must be done to deflate a bubble that expanded this year by "strictly" curbing speculation, Yang Weimin, deputy director of the party’s top financial and economic panel, said this month at a forum in Beijing. "We need to defuse a flurry of risks, contain asset bubbles, and improve oversight to ensure there won’t be a systemic financial risk," he said.

President Xi Jinping and his top economic policy makers are pledging prudent and neutral monetary policy and greater focus on deflating asset bubbles as they work to ensure stability in the lead up to a twice-a-decade Communist Party congress late next year, when members of the nation’s top leadership committee are expected to be replaced.

"Houses are built to be inhabited, not for speculation," they said in a statement released by the official Xinhua News Agency after the Central Economic Work Conference meeting this month. "Land supply should be increased reasonably in cities with strong pressure from rising prices,” it said. “De-stocking efforts in third- and fourth-tier cities should be stressed."

Xi reinforced that last week, saying China should deflate property bubbles. “The country should accurately understand the residential feature of housing,” he told another gathering of elite economic officials, Xinhua said. “The market will play the leading role in catering to multi-layered demand."

Buying Time

As policy makers have worked to cool hot markets this year, the central government has refrained from broad monetary policy changes or national down-payment standards and instead instructed local officials to tailor efforts. Authorities in several cities have rolled out restrictions since September, with Shanghai and Tianjin stepping up curbs last month.

But curbs are just buying time for policy makers and won’t fundamentally solve the crucial problem of regional imbalances, said Tommy Xie, an economist at OCBC Bank in Singapore.

"They need to push forward the combined reforms as they’ve pledged in the statement," Xie said. "But to deflate a bubble while cutting oversupply really isn’t easy."

— With assistance by Miao Han, and Emma Dong

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