After an unprecedented 2009 in which the Chinese property market was driven to historical highs, raising concerns of a bubble, this year growth is expected to be more rational and reasonable, CCB International, a subsidiary of China Construction Bank, predicted recently in an exclusive interview with FinanceAsia.
In the short run, residential property prices in China could move higher due to the demand-supply imbalance. CCB International notes that residential property inventory levels have generally been maintained at six to 10 months. However, the current property supply levels in Hangzhou and Shenzhen stands at three to four months, while in Shanghai it is even lower, at two to three months. This, according to the Chinese investment bank, indicates that the overall property supply in China is limited at the moment. And it was a supply shortfall coupled with constant demand that drove up property prices last year, noted Ren Wang, senior research analyst at the bank.
To curb price increases the Chinese government can take various steps, including controlling demand, boosting supply and changing people's expectations of property prices, continued Wang. He expects the government to support demand this year as any attempts to directly control it could trigger a slowdown in the overall economy. And boosting supply cannot be done overnight and has a lag of at least six months. "The supply and demand picture cannot possibly be changed in this critical six-month period, so this only leaves us with the last solution," he said.
The last solution -- managing expectations -- is also the rationale underlying the Chinese government's recent announcements regarding policy changes in the property market. While this cannot change property market fundamentals, it could prevent prices from significantly appreciating over the next six months. Wang predicts that property prices will start to ease in the second quarter this year and will fluctuate in the third and fourth quarters as supply is picking up.
The situation is different for commercial property as demand and supply are still quite balanced at this stage and prices are more reasonable. As a result, Wang still sees upside potential in the commercial sector.
Drivers for residential property prices
Urbanisation, continued social development and a growing economy will continue to drive the residential property market over the next few decades. Urbanisation in particular has become a major driver for residential housing demand. China, with its 1.3 billion population, has an urbanisation rate of 43% and the government has set a target to achieve 60% by 2050, slightly lower than the rate of 65% in major developed countries. In order to achieve this goal, around 7 million people will move from rural to urban areas annually.
"Compared to the 14 million residents in Beijing at the moment, this means that we have to build a Beijing every two years to accommodate the demand," said Wang.
Wang does not think affordability of property is, as yet, a major concern for China. "If you look at Chinese society as a whole and compare its urban income with property sales, the total urban household income is almost three times the total commodity housing sales," he highlighted. Absolute price levels in Shanghai and Beijing are also still lower than in other major developing cities -- for example, Shanghai is still 50% cheaper than Mumbai.
In the short-term, the luxury housing market may decline slightly as the government tightens mortgage policies. But in the long run, demand for luxury property will gain momentum and drive up prices. In addition, this year property prices should rise in second-tier cities, like Chongqing and Wuhan.
Outlook for property developers
Most developers in China have pre-sold their portfolios so their earnings this year are relatively secure. However, Wang has some concerns with regard to 2011 earnings as sales could slow during the course of this year.
He is, however, confident that the balance sheet situation for most developers is comfortable. "The situation is different from that of 2008 when the [bank finance market] really shut down for developers," said Wang. This time banks are still lending to developers, especially developers with strong brand names and wide market coverage. Besides, developers have the option to raise capital in the domestic equity and bond markets, or even in the overseas markets.
"It's a [recent] trend for developers to borrow from overseas markets both to diversify their funding channels and [to take advantage of] the expectation that renminbi appreciation will bring down their overseas borrowing costs," he explained.