China's Upside Down Housing Market

New homes typically sell at a premium to existing homes in China (for the same location), but an inverted price structure emerged this year after local governments ramped up housing regulations. The more extreme regulations such as housing lotteries have increased speculative fever, but with tight controls on new construction and below market pricing, speculators moved on to higher priced and less regulated existing homes.

Caijing: 多地一二手房价格严重“倒挂” 业内人士称主要是政策调控所致

First- and second-tier existing home prices are seriously "upside down"

In the first half of 2018, local cities have implemented strict control policies. The new housing market is generally subject to restrictions on purchases, price limits, and restrictions on loans. On this basis, the price of existing housing in some cities is “upside down”.

According to the statistics of my family research institute, in the first half of this year, Beijing's new commercial housing (excluding social housing) signed a total of 10,790 sets, down 23.34% from the 14076 in the second half of last year, a large proportion. In the first half of the year, the average transaction price of new homes was 43,198 yuan / square meter, a decrease of 5.84% from the average price of 45,879 yuan in the second half of last year.

At the same time, the total number of existing residential net sales in Beijing in the first half of the year was 76,640 sets, an increase of 57.6% over the second half of 2017. In the half-year trend, the two consecutive declines in 2017 ended, and the price has remained between 55,000 yuan and 60,000 yuan / square meter.

The flip in Beijing isn't entirely surprising though because the city core is well developed. Most new housing is in far-flung suburbs with lower prices:

Overall, the price of a existing homes in Beijing continued to “hang upside down” in the first half of the year. An industry insider pointed out that this is mainly because Beijing has entered the era of existing housing. The new houses are basically located in the remote suburban counties outside the Fifth Ring Road, so the price is lower than that of existing houses in the city center.

In the "hot" second-tier cities though, it is common to find the inverted pricing in the same area:

From the perspective of the existing housing market in Nanjing, Hangzhou, Shanghai, and Suzhou, price inversions are common in the same city, same area and came district. According to Zhuge looking for housing in Hangzhou Gongshu District, Jinan Lixia District, Guangzhou Huangpu District, Shanghai Jing'an District, Chengdu Chenghua District, Beijing Miyun District and other 20 urban data analysis results show that the new home/existing home price inversion is more common. The price difference ranges from 3,000 yuan / square meter to more than 6,000 yuan / square meter.

The above-mentioned insiders believe that this phenomenon is mainly caused by policy regulation, because the government's regulation of new houses is more direct and more powerful, and the price of existing homes is more formed by buyers and sellers in market transactions, and the impact of policies is relatively smaller.

The government has implemented more stringent property controls, but the evidence thus far points to a failure, most likely because it hasn't been able to stamp out credit funding.

Some don't see a problem with a market where new homes see excess demand and existing homes are allowed to trade more freely:

The person further analyzed that the phenomenon needs to be viewed from the specific conditions of cities, regions and real estate. In his view, in the long run, the “upside down” of existing home prices is not an unacceptable problem. Because the new housing market has the function of meeting the basic living needs of low- and middle-income people under the control, the new housing market can have two directions. One is the housing market, and the other is the pure commercial housing market. The price mechanism guarantees that the housing market will move forward according to the guaranteed price, while the pure commercial housing market will be priced by the market, and the two sides will not interfere with each other.

They won't interfere with each other in the short-term, at least not directly, but housing lotteries for below-market new homes has already whipped up speculative interest in some cities. If the government has figured out how to deliver enough low cost housing to new home buyers, it may neglect (or even encourage) rising existing home prices since its main concern is social stability. The true health of the housing market will now be reflected in existing home prices.