China's Housing Mess: Govts Stimulating Demand and Curbing Supply, Fever Rising

Even though credit creation is stabilizing in China (i.e. growth is falling), the credit still flows to the property market thanks to bank loans increasingly going to consumers, developers tapping riskier overseas capital, and the government's affordable housing push. For background see these recent posts:

Fading Shadow Banking
China Shadow Banking Growth Contracts Again
The Final Stage: China Copies U.S. Housing Bubble Policies

Additionally, China's current housing policies are at odds with very basic economic theory. China is stimulating demand with its latest "control" policy of housing lotteries that draw speculators and bystanders into the housing market because the homes sell at a discount. Anyone can win the lottery, hence everyone has an incentive to get a ticket. Leaving aside the direct economic impact, the lottery creates a powerful narrative of booming housing demand as consumer see tens of thousands of people waiting in line for a chance at a discounted home.

Local governments are simultaneously restricting supply by curbing commercial housing and replacing it with affordable housing. Supply is rising in pure numbers and should increase in the long-term, but the government is deciding what type of housing will be built. If they get it wrong, there will be shortages in certain market segments. Already, existing home prices are rising faster in some cities because this market is less regulated than new homes and the supply is fixed. It's creating distortions in housing data for some cities. (See: Central Planning 101: Housing "Shortages", Price Distortions Appear as Cities Limit Prices)

As a result, analysts expect more regulations are on the way.

iFeng: 楼市调控创纪录仍“高烧不退” 专家称思路亟待调整
China's regulation of the housing market has yet to show signs of loosening. The "high fever" housing market has not cooled. A number of experts interviewed by reporters from the China News Agency said that in the future, the regulation will be more stringent and the thinking will need to be adjusted.

Centaline Property Research Center statistics show that in May 2018, more than 40 cities in China published control policy contents as many as 50 times, refreshing the number of control policies for real estate in China. From January to May 2018, the number of times of real estate regulation in China has reached about 160 times, an increase of 60% year-on-year.
Analysts refer to China having 5 traditional weapons to control real estate, housing lotteries being the 6th.
In intensive regulation and control, local governments have also resorted to the “five-limit killing device” in addition to restricting purchases, limiting loans, limiting prices, restricting sales, and restricting commercial housing, and also opened the era of “lottery to buy houses”. As of now, at least eight cities in the Chinese mainland have started housing lotteries for new homes.
If slowing credit growth or tightening restrictions don't do the trick (and despite the current situation, I lean towards this being the last gasp for this cycle because credit growth is the engine pulling the train), they'll have to think of a 7th restriction because as discussed above and in 160 Buying Restrictions Added in 2018 and Home Prices Keep Rising, the lottery solution is driving demand up, not down:
Zhang Dawei, chief analyst of Centaline Real Estate, told the China News Service that housing lotteries means that real estate has entered a non-market sales stage and may temporarily stabilize housing prices, but it will actually stimulate more potential demand. The focus of real estate regulation should be adjustment, not simple control. He believes housing lotteries may continue in the future and become the choice of more cities.

However, the over-regulating and controlling policies did not seem to have caused the housing market to "recover from its fever." In May alone, Chengdu saw 70,000 people vie for 1,000 units; the Xi’an lottery bought a large number of households; Hangzhou long-term queuing caused people to faint; in Shenzhen's lottery buyers must first pay 5 million yuan to buy a house, "There are still 660 households competing for 167 houses."

Behind the scenes, the overall real estate market in China continues to heat up. According to data from the China Index Academy, the recent turnover of the Chinese real estate market has increased year-on-year. The area of ​​transactions in major cities monitored in May increased by 18.08% from the previous quarter and was up 12.45% year-on-year.

The turnover has climbed up, and housing companies have made quite a lot of income. The results of the Housing Corporation's announcement show that in May 2018, Country Garden’s sales performance topped RMB 300 billion, Vanke and Evergrande also reached RMB 239 billion and RMB 254.1 billion respectively. According to statistics from China, the total sales of the top 100 housing enterprises in China in the first five months reached 3.47 trillion yuan, a year-on-year increase of 33.5%.

Regulations continue to increase. In May, China’s Ministry of Housing and Urban-Rural Development interviewed cities such as Chengdu and Xi’an and was interviewed by cities to introduce measures to stabilize housing prices. For example, Chengdu has upgraded its purchase targets from natural persons to households, and Kunming, Guiyang, and Changchun have also upgraded their sales restrictions.

The Ministry of Housing and Urban-Rural Development of China reaffirmed its unwavering focus on real estate regulation and control and its efforts to make it clear from housing development planning, housing and land supply, capital control, market supervision, and implementation of main responsibilities.
If you were doubtful about the direction of Chinese monetary policy, the housing situation helps clarify. Government efforts are severely distorting market forces and creating the conditions for a melt-up in real estate prices as capital flows into the less regulated segments of the market. If China loosens monetary or credit policy with this housing environment, it will kick off another speculative mania. Until China gets a handle on the housing market, it cannot afford to ease.

No comments:

Post a Comment