1、 BBVA Economic Research Department May 2009 China Chinas residential property market has a bright long-term investment potential. However, near-term adjustments are unavoidable because of short-term excess supply and the sharp global recession. We estimate that downward price adjustments in resident
2、ial property prices of up to 20% in some first-tier cities are possible in the near term. Economic Research Department Page 1 of 33 Executive Summary 2 1. Introduction and Overview 3 2. Chinas Residential Property Market: Latest Developments and Some Characteristics 4 3. How Much Overvaluation Is Th
3、ere in Some Metropolitan Areas? 16 4. The Outlook for the Chinese Real Estate Market 22 Appendix 30 Box 1) Housing Finance 11 2) Housing Provident Fund 13 3) REITs in China? 27 Publication coordinator: BBVA Alicia Garcia-Herrero alicia.garcia-.hk Chief Emerging Market Economist This publication was
4、prepared by: BBVA Li-Gang Liu .hk Chief Economist for Greater China Andrew Tsang .hk Principal Economist Yuande Zhu Senior Economist China CITIC Bank Shulin Li Chonglan Zhong Closing date: April 30, 2009 China Real Estate Watch Economic Research Department Page 2 of 33 Executive Summary Chinas res
5、idential property market has a bright long-term investment potential, supported by fast income growth, rapid urbanization and a rapid depreciation of housing stocks. However, near-term adjustments are unavoidable given the sharp economic downturn and current oversupply in the high-end residential ho
6、using. Although the situation varies widely across provinces and cities, downward adjustments in prices of up to 20% in first-tier cities are possible in the near term. Our housing valuation measures, estimated based on the supply and demand conditions of major Chinese cities, suggest that the housi
7、ng prices in Beijing, Shanghai, and Shenzhen are currently overvalued by about 16%, 18%, and 20% from their respective equilibrium prices. However, the current resident housing prices in the Guangzhou appear to be reasonably priced, when compared with our equilibrium price measure. We also observe s
8、ome overvaluation in some second-tier cities such as Chongqing and Tianjin in the order of 20% to 25%. While we do see some further downward adjustments in residential housing prices, we view the probability that Chinas property market will experience a further sharp fall in prices as very low. This
9、 is because Chinas urban demand for housing will remain resilient given its high savings ratio, good growth prospects, low interest rate environment, and proactive government policies. As long as housing prices are flexible enough and can adjust according to economic conditions, demand is likely to
10、react accordingly. Indeed, the recent rebound in transaction volumes nationwide after some declines in prices illustrates this point. Given the residential housing market has been an important source of local government tax revenue, careful formulation of government policies is needed in order to al
11、leviate the impact of the near-term adjustment in the residential property market. Here are some of our proposals: o Local policy initiatives to reform the resident registration system to expand permanent urban population in their locales will help stimulate demand for housing, thus potentially easi
12、ng the fall in residential property prices. o Constructing more and providing affordable rental housing by local governments for low income families and migrants could stimulate the real estate sector investment and therefore the local economy. However, more government-provided low-price housing for
13、 low-income and middle-income population without stringent income test may create the wrong incentives and potentially drive down property prices further, leading to negative equity to the existing homeowners. o Accelerated urban renewal programs will help create demand through fast depreciation of
14、old housing stocks whose quality is already in need of upgrade. o Continued adoption of new mortgage finance instrument such as covered bonds will make housing finance less expensive and help reduce risk concentration in commercial banks. In addition, new financing instruments such as REITs could al
15、so be a useful means for real estate developers to widen their fund raising channel, reduce leverage, and share risks among a broad spectrum of investors. China Real Estate Watch Economic Research Department Page 3 of 33 1. Introduction and Overview After a period of surges in residential housing pr
16、ices, Chinas real estate market started to cool in the middle of 2008, largely because of the tight monetary policy and other administrative measures that were implemented at the end of 2007 in an attempt to rein in real estate investment and rapid rise in housing prices. Indeed, the ensuing global
17、financial crisis after the collapse of Lehman Brothers in September 2008 has quickly changed the outlook on residential housing in China. The nationwide housing price has experienced a decline for the time in a decade from December 2008 onwards (Chart 1). In some large cities, the fall in prices has
18、 been substantial. For example, Shenzhen, a city that has a high reliance on exports, has seen its monthly housing prices drop by over 15% in recent months (Chart 2). Though still moderate, Beijing and Shanghai have also started to experience falls in their housing prices. Chart 1: Real estate inves
19、tment and prices Chart 2: Property prices nationwide and in key cities 05001000150020002500300035001998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Jan-09Feb-09RMB billion-2024681012% yoyTotal real estate investment (lhs)property price growth (rhs)-20-15-10-50510152025% yoy, 3mma-20-15-10-50510
20、1520252005 2006 2007 2008% yoy, 3mmaOverall BeijingShanghai ShenzhenSources: CEIC and BBVA estimates. Sources: CEIC and BBVA estimates. While there is little doubt that Chinas residential property market has a bright long-term investment potential supported by long-term growth prospects, rapid urban
21、ization, and high urban population densities, how will Chinas residential property market fare in the current global financial crisis? Specifically, will the residential property market experience a hard landing? How much more downward adjustment is expected? Are there any differences in terms of th
22、e adjustments among key cities in China such as Beijing, Shanghai, Shenzhen, and Guangzhou? This first BBVA China Real Estate Watch intends to answer these questions in a comprehensive way. While we do see some further downward adjustments in residential housing prices, we view the probability that
23、Chinas property market will experience a hard landing as very low. This is because Chinas urban demand for housing remains resilient given Chinas high savings ratio, good growth prospects because of the fiscal stimulus package, low interest rate environment, and proactive central and local governmen
24、t policies to stimulate the real estate sector. As long as housing prices are flexible enough and can adjust according to economic conditions, we believe demand will likely react quickly. Indeed, the recent rebound in transaction volumes nationwide after falls in prices illustrates this point. Howev
25、er, some further near-term adjustments in an economic downturn are unavoidable, as the short-term structural oversupply exists in the high-end residential housing and the economy is expected to grow at or even below its medium-term potential. Therefore, further downward adjustments in price of up to
26、 20% in some first tier cities are possible in near term. China Real Estate Watch Economic Research Department Page 4 of 33 Our housing valuation measures, estimated based on the supply and demand conditions of individual cities, suggest that the current housing prices in Beijing, Shanghai, and Shen
27、zhen are overvalued by about 16%, 18%, and 20% from their respective equilibrium values. However, the current resident housing price in Guangzhou appears to be reasonably priced according to our valuation measure. We also observe some price overvaluation in some second-tier cities such as Chongqing
28、and Tianjin in the order of 20% to 25%, respectively, according to our equilibrium valuation measures. The rest of the report proceeds as follows: Section 2 provides an overview of Chinas real estate market. Section 3 uses a supply and demand framework to estimate whether there is over- or under-val
29、uation in some key Chinese cities using a newly constructed quarterly database. Section 4 looks at the impact of real estate cycles on macroeconomic activities from international experiences and draws some policy lessons for China. 2. Chinas Residential Property Market: Latest Developments and Some
30、Characteristics Although China has allowed private housing ownership since the early 1980s soon after the 1978 economic opening and reform, wide-spread private housing ownership did not take place until 1998 when the State Council decided to completely phase out the old housing distribution system a
31、fter experiments already having taken place in some coastal cities and provinces. Privately-owned residential housing thus has a short history in the post reform China. Despite a slow start, this market has developed quickly over the last decade and it has since become an important asset class for p
32、ortfolio allocation of Chinese residents. We estimate that the nationwide urban real estate assets are at around RMB 60 trillion, already far exceeding either the size of Chinas banking deposits or the stock markets (Chart 3). Therefore, the health of the housing sector is to have an important impac
33、t on the real activity as well as the health of Chinas banking system. Chart 3: Value of Assets Sources: CEIC and BBVA estimates. 202% of GDP54% of GDP115% of GDP010,00020,00030,00040,00050,00060,00070,00080,000Household BankDepositsStock MarketCapitalizationValue of UrbanHousing StockRMB billionChi
34、na Real Estate Watch Economic Research Department Page 5 of 33 Nationwide property market cycles: The first five years (1998-2003) since the private housing ownership became relevant saw only moderate increases in the nationwide property prices, consistent with a macroeconomic environment where infl
35、ation was low or even negative and the economy was still recovering from the impact of the Asian financial crisis. Chinas housing prices did not really experience a large increase until 2003 when the economy experienced a short episode of economic overheating. The property prices then started to inc
36、rease at an unprecedented pace (namely at an average of 7.4% per annum) till 2005. The macroeconomic tightening measures ensued seemed to have worked to dampen the rapid rise in housing prices. However, the surges started again in 2007, possibly driven by rising capital inflows and faster appreciati
37、on of the RMB exchange rate. This cycle peaked in mid 2008. The nationwide real estate prices have since decelerated fast and started to decline since the end of 2008. Property cycles in Key Cities: Beijing: The residential property price did not take off until 2003. It had since risen at an average
38、d 7.6% until 2007. The property prices have started to cool down since the beginning of 2008, after a sharp 11% increase in 2007 (Chart 4a). The peak of Beijings housing price is also coincided with the peak of its real estate investment cycle. Shanghai: Its housing prices started to rise in 2001 an
39、d peaked in 2003 after registering a yoy growth of over 20%. Growth in the property prices on average soon dropped sharply and even declined by 2 to 3% in 2006. The price rebounded somewhat in 2007 and 2008 before declining again in early 2009 (Chart 4b). Shenzhen: Affected by the Asian financial cr
40、isis in 1997-98, Shenzhens housing prices stagnated for the period of 1998 to 2002. After 2003, the housing prices rose sharply and peaked in 2006 and 2007 with a yoy growth at over 17%. The residential housing prices have since dropped sharply. The price falls in Shenzhen have been the largest so f
41、ar among the key cities in China with a large negative yoy growth of 15.7% in February 2009 (Chart 4c). Guangzhou: Affected seriously by the Asian financial crisis, Guangzhous property prices fell over the period from 1998 to 2003. The decline in the residential property prices was the largest in 19
42、99 with a negative 5%. The city saw a moderate recovery of housing prices between 2004 and 2007. However, the rebound over the period was not very large. For example, the largest increase was close to 7% in 2007. The prices then declined again in 2009 by as much as 5% in early 2009. Tianjin: The hou
43、sing prices in Tianjin stagnated for the period of 1998 to 2002. It took off sharply in 2003 and peaked in 2004 with a yoy growth rate of over 13% driven by central government intentions to enhance Tianjins status as a high-tech and financial center for Northeast China. Rapid growth in housing price
44、s halted in 2005 and it had since been maintained at a yoy rate of less than 6 until a large drop to a negative 2% in 2009. Despite price moderations, real estate investment continued to rise at a fast rate. Indeed, the supply factor especially after the set up of a new special economic zone in Tian
45、jin in 2005 will continue to affect Tianjins property prices. Chongqing: It appears that Chongqings residential housing prices had already experienced a cycle after its naming as the fourth Municipality-a status similar to a province-in China in 1997. This cycle bottomed in 2001; another cycle soon
46、began and it was peaked in 2004 at a yoy growth rate of 14%. Although growth in property prices rebounded after 2006, it has dropped sharply after 2008 to an averaged negative 2% in early 2009. Chongqing is another city where real estate investment has seen rapid increase after 2005. China Real Esta
47、te Watch Economic Research Department Page 6 of 33 Chart 4: Citywide Real Estate Investment and Property Prices a) Beijing 05010015020025019981999200020012002200320042005200620072008Jan-09Feb-09RMB billion-2024681012% yoyReal estate investment (lhs)Property price growth (rhs)b) Shanghai 020406080100
48、12014016019981999200020012002200320042005200620072008Jan-09Feb-09RMB billion-10-50510152025% yoyShanghai real estate investment (lhs)Shanghai property price growth (rhs)c) Shenzhen 01020304050601998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Jan-09 Feb-09RMB billion-20-15-10-505101520% yoyReal
49、 estate investment (lhs)Property price growth (rhs)d) Guangzhou 010203040506070809019981999200020012002200320042005200620072008Jan-09Feb-09RMB billion-6-4-202468% yoyReal estate investment (lhs)Property price growth (rhs)e) Chongqing 0204060801001201998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Jan-09 Feb-09RMB billion-4-2024681012141618% yoyReal estate investment (lhs)Property price growth (rhs)f) Tianjin 01020304050607
