IMF Survey : Experts Confer on State of China’s Housing Market

IMF News, January 29, 2016

Source details

Canonical URL: IMF Survey : Experts Confer on State of China’s Housing Market

Conference: International Symposium on Housing and Financial Stability in China, organized by the IMF in cooperation with the Chinese University of Hong Kong, Shenzhen and Princeton University; held in Shenzhen.
Publication date: January 29, 2016.
Purpose: Spotlighted new data sets on China’s housing markets as part of the Global Housing Watch initiative and IMF enhanced surveillance of global housing markets.

National trend masks large city-level variation in house price movements.
Residential land price index for 35 large cities (based on government sales of land to private developers) findings:
- Prices increased in inflation-adjusted terms by about 80 percent a year in Beijing over the past decade.
- Prices increased by only 10 percent a year in Xian over the past decade.
Gyourko’s estimates of balance between housing supply and demand in the 35 cities:
- In 20 percent of the cities (including Beijing, Hangzhou, Shanghai, Shenzhen) supply remains “below our projected demand.”
- In 40 percent of the cities (including Xian) supply is “at least 30 percent above projected demand.”
- The remaining 40 percent of cities are “modestly over-supplied.”

Data source: comprehensive mortgage-loan data set from 2003 to 2013 from a major bank.
Positive indicators:
- Household disposable income has grown annually by 9 percent for a decade.
- Homeowners put a down payment of over 30 percent on mortgage loans.
Affordability and risk metrics:
- House price-to-income ratio is around eight in smaller cities.
- House price-to-income ratio is greater than ten in the largest cities.
- High ratios imply that small adverse changes in income growth profiles for low-income households could impair mortgage repayment ability.
Comparative risk note:
- U.S. experience: “expectations that house prices could never fall” was a fatal flaw.
- China-specific risk: “markets having irrational expectations of short-run income growth.”

Institutional constraint: local Chinese governments are prevented from directly issuing debt to fund mandated capital projects.
Funding mechanism: local governments sell public land to raise funding; future land sales revenue is committed to repay local government debt.
Collateral practice: land parcels are the most widely-used collateral for local government debt.
Risk implication: “a substantial drop in housing or land prices may increase the risk level of local government debt.”

Short-term risks exist, but should be weighed against China’s long-run rebalancing goals.
Post-global financial crisis growth: “relied heavily on credit and investment, particularly real estate investment.”
Rebalancing aim: shift toward growth that is more sustainable.
Urban development strategy question:
- Whether China should follow a European/Japanese model of a few large-population cities or develop more megacities dispersed across the country.
- Preference expressed for developing more megacities to relieve pressure on housing and other amenities in big cities.

The Shenzhen conference was the fourth in a Global Housing Watch conference series:
- First two conferences focused on housing markets in advanced economies (Dallas and Frankfurt).
- Third conference, in Bangalore, expanded coverage to emerging markets.
Messaging: enhanced surveillance of housing markets reflects the view that the “era of benign neglect of house price booms is over.”

Source: IMF Survey : Experts Confer on State of China’s Housing Market, January 29, 2016.