Time to worry about Shenzhen housing bubble

Chinese authorities have unveiled various measures to support the property market. The central bank is also continuing to ease its monetary policy.

This suggests that Beijing is again looking to the property market to shore up the broader economy.

But it remains open to question whether the trick will work. Meanwhile, risks of a housing bubble are rising again.

Property markets in Shenzhen and some other first-tier cities have become heated due to Beijing’s monetary easing measures and relaxation on the sector.

The government has kept injecting liquidity into the system through open market operations and increased bank lending.

Newly-added loans spiked to a record 2.51 trillion yuan in the first month of this year.

And central bank governor Zhou Xiaochuan has openly encouraged acceleration in mortgage lending.

All the developments indicate that the central government is keen to inflate the housing bubble in order to shore up economic growth.

It's a trick that Beijing has tried several times in the past.

But will it work again now?

There's no doubt that China's economic growth is closely tied to housing prices. Both moved in tandem with each other between 2006 and 2012.

That said, the contribution of the housing sector to overall economic growth has weakened since 2013.

There might be two reasons.

First, the GDP data has been tweaked since 2013 and the figures fail to reflect the real picture. Second, construction and other related sectors have less weighting in the nation’s economy as Beijing seeks a structural transformation.

We've tried to analyze the correlation with the more accurate economic indicators followed by Premier Li Keqiang. It shows that the correlation reaches 0.71.

Shenzhen market is the best example of the frenetic mainland housing market.

New home prices in the city have soared nearly 50 percent over the last 12 months. And the average price has spiked to a range of 60,000 to 100,000 yuan per square meter, which already exceeds the level in some new flats in Hong Kong's New Territories.

Nevertheless, the medium income in Shenzhen is reported at 4,500 yuan per month, equivalent to a third of that in Hong Kong. Therefore, housing affordability in Shenzhen is even worse than in Hong Kong.

In that sense, the housing market in Shenzhen and other first-tier cities in China is quite risky.

In the meantime, housing prices in some lower-tier cities posted only modest gains. The reason is high inventory.

It's said that there is a total of 8.08 billion square meters of housing under construction or ready for sale right now, up 12 percent from 2014. It would take 6.3 years to deplete such high inventory.

The property market cycle in Hong Kong over the last 20 years shows that if home prices spike over 50 percent within 12 months, as we’ve seen in 1997, the stage is set for a bursting of the bubble.

This is something that Shenzhen property buyers should bear in mind.

This article appeared in the Hong Kong Economic Journal on March 3.

Translation by Julie Zhu

[Chinese version中文版]

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