GRIM TIDINGS

One reason China’s housing market collapse will get even uglier: home ownership is already 87%

Obsession
China's Transition
Obsession
China's Transition

The news from China’s property sector continues to be grim. On Friday, the National Bureau of Statistics published September home sales data from 70 of the country’s biggest cities. The good news is that home sales fell 1.03% in September, versus the previous month; in August the same measure came in at -1.15%.

However, September and October are historically the Chinese market’s peak months for home sales. That makes the -1.2% decline in sales prices versus Sep. 2013 all the more worrying. In fact, as you can see, what has been merely the year-on-year slowing of growth in housing prices has now dipped into negative territory:

Change-in-commercial-home-prices-in-70-of-China-s-biggest-cities-Monthly-change-Annual-change_chartbuilder

As we’ve explored in the past, China’s economy depends heavily on housing investment for growth. And as a result of gloomy sales prospects, investment growth continues to slip lower, dragging Q3 growth down to 7.3%, the slowest pace since early 2009, just after the global financial crisis hit.

Things could yet turn around. In late September, the central bank eased mortgage lending standards to shore up the housing market. The new policy lets second-time buyers receive preferential mortgage rates usually reserved for first-time buyers, provided they have paid off their previous mortgages. As Bank of America/Merrill Lynch economist Ting Lu notes, this will likely reduce the down-payment ratio from 60% or more to 30%.

Then again, since the spring, dozens of cities have relaxed restrictions on multiple home purchases in a bid to boost sales—and to little avail. That doesn’t bode well for the success of the central bank’s policy change.

The problem lies in why people would want to buy a second (or third) home in the first place. Some might be upgrading—getting a bigger place to start a family and such. But many more have invest in property because it’s been the surest way to grow one’s wealth, since the Chinese government’s closed financial system makes it difficult to invest outside the country.

But that makes China’s housing market more like a stock market in terms of motivation to buy; people buy when they think home prices will go up, not because they need somewhere to live.

It also implies that most people who can afford houses have already bought them. As it happens, a study by Southwestern University of Finance and Economics (pdf, link in Chinese) published earlier this year shows that China’s urban home ownership rate is already 87%, notes Kent Troutman, an economist at Peterson Institute for International Economics. Here’s how that stacks up against other major economies:

Urban-home-ownership-rates_chartbuilder

Meanwhile, the urban vacancy rate is around 22%—probably because, despite all those restrictions on multiple home purchases that have recently been relaxed, first-time buyers constitute less than one-fifth of overall housing demand.

That makes a near-term housing recovery look wildly optimistic. However, the SUFE study offers a nugget that makes the long term seem similarly bleak. China’s leaders are counting on rural migration to cities to boost housing demand over the next decade or so—a process called “urbanization.” As Troutman points out, though, rural home ownership is already at 97%.

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