China's Housing Market: Defying the Odds?

IMF Blog, February 1, 2016

Source details

Publication: iMFdirect
Date: February 1, 2016
Theme: Concerns about the stability of housing markets given historical precedents and potential systemic financial-sector spillovers.

Japan: house prices rose by about 40 percent during the mid-1980s; the collapse was followed by a ‘lost decade’ in which incomes did not grow and house prices fell by over 40 percent.
United States: house prices increased by about 30 percent between 2001 and 2006; their collapse was followed by the global financial crisis of 2008-2009.

Aggregate trend:
- House prices in China have continued their long upward march over the past decade (Chart 1), despite some reversals.
City-level heterogeneity:
- The steady increase in China’s house prices at the national level masks tremendous variation at the city level.
- There is substantial heterogeneity across cities in the balance between housing supply and demand.
- At one end, housing supply has outpaced demand in the interior part of the country.
- At the other end, housing demand has outpaced supply in most major eastern markets, such as Beijing, Hangzhou, Shanghai, and Shenzhen.
Valuation risk:
- Markets such as Beijing, despite their strong measured fundamentals, should be considered somewhat risky because homes there trade at very high multiples of rent.

History shows that housing collapses can be very costly and can lead to broader financial-sector collapse and high government cleanup costs.
The identified heterogeneity implies differentiated risks across cities rather than uniform national exposure.
High price-to-rent multiples in major eastern markets signal elevated valuation risk even where fundamentals appear strong.

Source: iMFdirect, February 1, 2016.