China house prices to rise faster in 2018 as buyers turn to smaller cities

Beijing

HOME prices and property investment in China are expected to rise more this year than first thought, as tight controls in big cities continue to push buyers into less-regulated smaller markets, a Reuters poll showed.

The pick-up could offer much-needed support to China's slowing economy as the United States ratchets up tariffs on Chinese goods, though policymakers are likely to remain keenly aware of the risk of property bubbles.

House prices in China - where a near-three-year real estate boom has spilled over from megacities to the hinterland - will rise 5 per cent this year and 3.3 per cent in 2019, according to the Reuters poll of 16 property analysts and economists.

That outpaces the one per cent gain seen in a previous poll in March and would only be marginally slower than the actual increase of 5.4 per cent in 2017.

Property investment is now expected to grow 8 per cent this year, higher than the last poll's 5 per cent, as developers look to rebuild their housing inventories and as the construction of public housing accelerates.

"Although escalating Sino-US trade conflicts will affect China's GDP, the domestic housing market is still driven by local supply and demand so it is unlikely to change course in the short term," said David Ji, head of research and consultancy for Greater China at property consultancy Knight Frank.

US President Donald Trump warned on Friday he was ready to slap tariffs on virtually all Chinese imports into the United States, threatening duties on another US$267 billion of goods on top of US$200 billion in imports primed for levies in coming days.

China's housing market - a major economic growth driver - took off in early 2016 as the government eased curbs on buyers to help spur the slowing economy and reduce high inventories of unsold homes in smaller cities.

But the ensuing boom soon triggered concerns of a speculative bubble, forcing authorities to take action such as restricting lending to the sector and sharply raising the bar for purchasers. The moves helped to cut home price inflation by more than half in 2017 from a double-digit pace in 2016.

Still, analysts expect many less-regulated cities to continue riding the boom for a while longer.

Pent-up demand is spilling over from residents of strictly-controlled tier-1 and tier-2 cities, while price rises in smaller cities and towns are encouraging more local buyers to take the plunge amid strong government support to reduce home inventories.

China has invested 990 billion yuan (S$198.3 billion) in a massive urban redevelopment project through the Pledged Supplementary Lending (PSL) programme, which has been largely used for cash compensation to residents whose homes are demolished.

China's property investment growth accelerated to its quickest pace in nearly two years in July, while property sales and new construction starts also quickened.

"Resilient sentiment and generally modest inventories of unsold housing will support house prices," said He Tianjie from Oxford Economics.

Sheng Songcheng, a policy adviser to the central bank, warned on Monday that China's misinformed housing policies have distorted the market, and the country's housing inventories have in reality fallen to an alarmingly low level. Only one analyst polled by Reuters expected home prices to fall in 2018.

While Beijing is easing overall credit conditions in the face of slowing domestic demand, analysts think it will be more cautious about stimulating property investment than it has been in past downturns.

Most market watchers believe authorities will maintain their clampdown on illegal financing to the property sector, but their views diverged on whether regulators will ease restrictions on cash-starved developers' access to other sources of funding.

"Property developers would not suffer a lot," said Iris Pang, an economist with ING bank in Singapore.

"The next question is whether their roll-over of bonds would suffer from a higher interest cost. But as Shibor has come down quite a lot, we don't see it as a big issue for most developers," she added, referring to a recent moderation in interbank rates following fund injections by the central bank.

Meanwhile, Chinese housing appears steadily less affordable, posing a longer-term risk as household debt rises and consumers have less to spend on other purchases.

Asked to rate the affordability of Chinese housing on a scale of one being the cheapest and 10 the most expensive, the median answer was seven, up from analysts' estimates of six in the last poll. REUTERS