Contrary to popular belief, the Chinese housing market is not in the midst of a massive bubble, says Larry Hu, head of China economics at Macquarie Securities Ltd., according to Bloomberg. Rather, he contends that skyrocketing housing prices in China’s largest cities are the result of a shortage of supply coupled with consistent demand growth and immigration.
China’s largest cities have experienced drastic surges in housing prices in recent years. According to the New York Times- which reports that “China is in the midst of a dizzying housing bubble”- Shanghai’s average housing price has jumped by one-third in the space of a year, with Beijing and Guangzhou seeing similar increases. Shenzhen, another major Chinese city, has experienced a stunning 60% spike in housing prices within the past year.
At the same time, long-term housing loans (including mortgages) doubled their share of total official bank lending this year, growing from 20% at the beginning of the year to 40% in August, fueling fears that Chinese property is one of the biggest bubbles in history.
However, Hu notes, many smaller cities have not experienced similar housing price gains.“The difference between over investment versus mismatch is the single most important thing to keep in mind when thinking about China’s property sector, as these two views have vastly different implications for investment and government policy,” he wrote.
Hu also observes that larger cities have consistently experienced net immigration with only a limited supply of property entering the market, which leads him to declaim, “this is not a bubble; this is a shortage of supply.” Broadening the scope of focus to include smaller cities yields the surprising insight that housing has become more affordable at the national level, due in part to rising incomes.
As for the largest cities, Hu notes that continued migration into urban areas has maintained a steady floor on housing demand. At the same time, he believes that market-cooling measures imposed by municipal governments ought to mitigate at least part of the risk.
Since September 30, as many as 22 of the largest Chinese cities have passed market-tightening regulations such as raising the down payment on homes to around 30%, raising taxes on additional property purchases, and restricting non-residents from buying property. Such moves are likely driving the decline in China’s home sales that occurred in the first two weeks of October.