Perspective on Asia, China housing update July 2018: Elliot Clarke

Momentum in China’s housing market has continued to build in recent months. At June, 84% of the 70 cities surveyed were reporting monthly price gains – the strongest outcome since August 2016. At 90%, gains for the established market were broader still – a high back to April 2013.

While the breadth of gains is striking, their quantum remains relatively subdued compared to heights reached in 2015 and 2016.

For new housing, prices in tier 2 are currently up 6.6%yr, while in tier 3 they have risen 6.0%yr. Tier 1 house prices are, in contrast, broadly in line with their year ago levels after annual growth troughed at –1.0% in April.   

For existing housing, very similar outcomes have been seen: prices in tier 1 are unchanged; and in tier 2 and tier 3, they are up 6.3%yr and 3.8%yr respectively.

Taking a look at the monthly growth pulse for new housing, it is evident that momentum is picking up. Average growth has lifted from –0.1% in January to 0.3% in June; while the maximum gain has jumped from 1.2% to 3.3%. 

Authorities are less likely to react to accelerating price growth in this instance given it is being seen in tier 2 and 3, where construction activity and wealth gains are desired, and because (in a macro sense) strength in residential construction is currently necessary to offset weakness in other key sectors – namely utilities and transport.

Growth in housing starts has accelerated ahead of sales, so it is right to expect construction momentum to hold up in the second half of 2018.

That being said, if the pace of sales does not follow, then construction activity growth will again fall back as inventory is worked through.

If authorities decide that a further easing of financing conditions is needed, it will come via another cut to the Reserve Requirement Ratio (we forecast 100bps by year end) and the provision of additional liquidity to interbank markets. By and large, region-specific mortgage restrictions will remain in place.  

Elliot Clarke is a senior economist at Westpac and can be contacted here.