On Friday, we summarized research reports from Deutsche Bank and Bank of America, which came to the same conclusion: the fate of the global economic rebound may be in the hands of the Chinese housing bubble, which through price appreciation has unleashed wealth effect equivalent to twice the annual disposable income of China.
We concluded by saying that those who are looking for key inflection points to determine the future trajectory of the global economy, in addition to the global (read Chinese) credit impulse, we suggest keeping a close eye on what happens with Chinese housing, which has become a – if not the – top variable for the fate of the both the great inflation-deflation debate, as well as the overall fate of the world economy
The key variable is “how Beijing manages to deflate the existing bubble: if it fails to be aggressive enough, home prices will once again spike, leading to an even more precarious bubble. If it is too aggressive, a hard landing is in store, coupled with what a crash in the country’s financial system, where the bulk of the banks’ $35 trillion in assets is collateralized by housing values. While such a crash may not necessarily lead to a catastrophe for China, where the government ultimately backstops all the banks, the deflationary wave spread around the globe from a housing crash would be dire.”
One answer was revealed just hours later, when on Saturday China’s NBS revealed that following two months of broad but shallow declines, in February there was an unexpected rebound in Chinese home prices, which last month rose in more cities despite increased “restrictions” on property transactions by local authorities. As Bloomberg reported, new home prices, excluding subsidized housing, gained in February in 56 out of 70 cities tracked by the government, compared with 45 in January, the National Bureau of Statistics said Saturday. Furthermore, prices climbed in 67 out of 70 cities from a year earlier, compared with 66 in January.
As Goldman calculates, prices in the primary market increased 0.4% month-over-month after seasonal adjustment (weighted by population) in February, the same as the growth rate in January.
And while on a year-over-year, population-weighted basis, housing prices in the 70 cities were up 12.0%, slightly lower than 12.4% yoy in January, the nuance was once again among the various city ties. On month-over-month basis, house price growth diverged among different city tiers. Home price inflation decelerated in tier-1 cities, but home price inflation in tier 2/3/4 cities was steady or accelerated, which goes back to the core issue discussed last Friday: for all the talk about moderating home prices, China is first and foremost focused on preserving the wealth effect, which a sharp drop in home prices would crush.
February average price growth was 0.2% month-over-month after seasonal adjustment in tier-1 cities, vs. 0.3% in January. Average property price inflation in tier 2/3/4 cities was 0.6%/0.4%/0.5% month-over-month sa in February, vs 0.5%/0.4%/0.3% in January. Indeed, as Bloomberg Intellgience wrote earlier in March, braking measures to counteract soaring home prices in eastern China’s largest cities appear to be diverting demand to smaller ones. Saturday’s data confirms this.
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The unexpected pick up in prices takes place as various Tier 1 cities are taking further measures to cool the market: among them, Beijing on Friday raised down-payment requirements for second homes 10 percentage points to between 60 percent and 80 percent. The rule also applied to buyers who don’t currently own a home but previously had a mortgage with the same down-payment threshold, making it harder for someone to sell their house to upgrade to a bigger or more expensive property.
Other cities taking additional measures were the southern export hub of Guangzhou, coastal Qingdao and Nanjing in the southeast have also tightened measures. Changsha, the capital of inland Hunan province, joined the ranks on Saturday after the home price data release.
“The government intends to pause the surging home prices, and let them walk steadily up later,” said Xia Dan, a Shanghai-based analyst at Bank of Communications Co., adding that if curbs on demand are lifted, prices will rise further. “The government doesn’t want the prices to run all the time and ferment bubbles.”
As Bloomberg notes, China’s biggest cities have seen a round of home price surges in the past year. In Beijing, new home prices rose 24 percent in February from a year earlier, while Shanghai saw a 25 percent gain. Shenzhen prices increased 14 percent in the same period.
“Beijing’s tightening will have a short-term effect to stabilize the market, but the power of policy has become increasingly weaker,” Zhang Hongwei, a research director at Shanghai-based Tospur Real Estate Consulting Co., said Friday, adding more local tightening may follow.
Or maybe not, because one may ask: is the rebound really unexpected. Perhaps not: as the WSJ reported on Sunday, “this year it seemed China was finally going to make headway on an idea familiar to U.S. homeowners: a property tax.
For many Chinese families, owning a home is one of few options to build wealth, driving buying frenzies as people rush to purchase before prices soar. Imposing costs on homeowners through a property tax is seen as a way to tame such speculation, while also helping fund local governments.
Lu Kehua, China’s vice housing minister, last month said the government needed to “speed up” a property-tax law. Economists and academics have long recommended the move.
Yet the annual National People’s Congress came and went this month with no discussion of the topic. An NPC spokeswoman said a property tax wouldn’t be on the legislative agenda for the rest of the year.
In short, China evaluted the risk of a potential housing bubble burst, and deciding that – at least for the time being – it is not worth the threat of losing a third of Chinese GDP in “wealth effect”, got cold feet. Expect the recent dip in home prices to promptly stabilize, with gains in the short-term more likely that not.