One of the primary drags on China's economic growth this year has been the declining housing market. The market continues to show signs of a rebound that will eventually add a boost to growth in the short-term.
The rebound has been driven by a few factors:
- The housing price drop over the last year has come as disposable income averaged an 8.5% increase (rising incomes with lower house prices). Effective price drops over the last year have been in the double digits, enticing buyers back into the market.
- PBOC measures have brought down borrowing rates.
- Mortgage restrictions, among other housing market restrictions, were lowered in March as Beijing tried to stimulate the market.
- Developers have been able to tap into homeowners' desire to upgrade.
Positive developments pointing to a rebound:
- Prices are improving (see charts).
- Residential property sales are up 16% from last year.
- Completed residential construction declined 17% so far this year vs. last. New housing starts this year are down 16%. I calculate that this amounts to about 1.5 million fewer housing units on tap to be finished this year compared with last year; 7.5 million units of total supply this year at current trends.
- Although it is difficult to estimate housing demand, Goldman Sachs estimates equilibrium housing demand - given new household formation, urbanization, and obsolescence - is between 7.5 to 8 million units a year. At the current pace, demand is probably outstripping supply this year, and a pickup in sales and prices should boost new construction.
- The drivers of this housing rebound seem to be buyers intent on living in an upgraded house, not investors. An FT survey from May shows that potential homebuyers are expressing interest for self-occupancy home purchases, but have turned negative on purchasing for investment purposes.
- 45% of developers surveyed said that upgrades were the largest source of home sales in recent months.
- Investors seem less inclined to enter the market this year. In May, 14% of those in the FT survey said they intend to invest in property in the next three months. A property rebound driven by housing occupants and not investors may be more durable.
- Housing market improvement are taking place primarily in the first and second-tier cities, where housing rebounds will have a greater effect on the overall economy (see the map below).
The property market is improving, but there are still negatives:
- Real estate investment is growing at a weak 3.4% on the year.
- New housing starts are still declining, down 16% on the year.
- China has a sizable oversupply of unused homes; some estimates put vacancy rates at 22%. But, it is important to point out many of these empty units are investment properties not intended for occupancy.
Structural and demographic changes may be changing long-term housing market prospects, and easing efforts to support the property market might renew bubble worries. But in the short-term, the housing market seems to be on the front end of a rebound. Real estate makes up ( directly and indirectly) about a quarter of China's economic growth. A real estate rebound is a significant development.