Even before the latest Chinese home price data was released overnight, it was a pure bubble-buying frenzy.
As Chris Watling, the CEO of Longview Economics, told CNBC Thursday, "I think what's going on in China is troubling ... some of the valuations there are really quite extraordinary... We've double checked these numbers about seven times, because I found them quite hard to believe."
What Watling found is that housing in major cities in China has seen price hikes over the last year that resemble the famous Dutch "Tulip Fever" bubble of 1637, according to new research by economic consultancy firm Longview Economics: the firm found that only San Jose in the Silicon Valley is more expensive than Shenzhen. The Chinese city has seen prices rise 76% since the start of 2015, with the acceleration beginning in April 2015 as the country's stock market was nearing its peak. The situation in Beijing and Shanghai is similar, albeit less extreme, the company states.
According to Watling, the typical home in Shenzhen costs approximately $800,000. Watling said that the house-income ratio in Shenzhen is now running at 70 times, compared to around 16 times in somewhere like London.
"Housing in some of the tier 1 cities is more expensive than it is in London, which I think itself is on a bubble, Watling added. "The (stock) market exploded to the upside and then crashed dramatically. That money had to go somewhere, so it washed around the system ... so a lot of it has gone into housing."
China, the biggest economic story of the last 30 years, has soured in the eyes of many analysts. A stock market crash that began in the country last summer has highlighted the vast difficulties Chinese lawmakers are now facing. Watling said Chinese housing was a story built on credit, lots of liquidity and lots of debt. He added that all bubbles, though, once established, will eventually burst and deflate.
It will, but not yet.
According to the latest Chinese housing data released overnight, Chinese home prices rose the most in more than six years last month, suggesting local government efforts to avert a housing bubble are having only a limited effect according to Bloomberg. Average new-home prices in the 70 cities rose 1.2% in August from July, the biggest increase since Bloomberg started tracking records in January 2010. The value of home sales jumped 33 percent last month from a year earlier, the fastest pace in four months.
“Price growth accelerated in cities all of tiers,” the statistics bureau said in a statement released with the data. Almost half of the cities where prices increased had larger gains than in July, it added.
New-home prices, excluding government-subsidized housing, in August gained in 64 of the 70 cities the government tracks, compared with 51 in July, the National Bureau of Statistics said Monday. Prices fell in four cities, compared with 16 a month earlier, and were unchanged in two.
As Bloomberg notes, the jump in home prices comes in spite of lending curbs which have spread from major cities such as Shanghai and Shenzhen to regional hubs. That may may lead to further restrictions as policymakers become increasingly concerned about averting an asset bubble, said Xia Dan, a Shanghai-based analyst at Bank of Communications Co.
More importantly, Standard Chartered head of Greater China economic research Ding Shuang the latest surge in Chinese property prices in August suggests further broad-base easing by the PBOC is unlikely this year. He added that the home prices divergence continues with tier 1 and tier 2 cities overheating, whereas smaller cities are struggling to reduce inventory. As a result, Shuang expects PBOC to keep monetary policy prudent; and sees no further interest rate cut for the rest of the year. He also believes the Chinese government will introduce more curbs in major cities, such as a higher down-payment as mortgage loans are growing quickly
Hangzhou, Zhejiang’s provincial capital, on Sunday halted home sales to some non-local residents, adding to similar restrictions introduced last month in Suzhou and Xiamen. China’s top leaders, after a Politburo meeting led by President Xi Jinping, in July pledged to curb asset bubbles amid a renewed focus on financial stability.
However, for most Tier 1 cities, the curvs are having zero impact: prices climbed a record 4.4 percent and 3.6 percent in Shanghai and Beijing respectively, taking the year-on-year gains to 31 percent and 24 percent. Values rose 2.1 percent in Shenzhen and 2.4 percent in Guangzhou, both faster than a month earlier. Home prices climbed the fastest in regional hubs where local authorities haven’t introduced curbs. Zhengzhou, the provincial capital of central Henan province, led gains with a 5.5 percent increase, up from a 2 percent gain in July. Prices in Wuxi, a manufacturing base in southern Jiangsu province, followed with a 4.9 percent gain, compared with 2.7 percent a month earlier.
Some more details from Goldman:
Housing prices in the primary market increased 1.6% month-over-month after seasonal adjustment (weighted by population) in August, higher than the growth rate in July. Almost all cities saw price increases in August from July: Out of 70 cities monitored by China’s National Bureau of Statistics (NBS), 66 saw housing prices increase in August from the previous month (58 in July, on a seasonally-adjusted basis).
On a year-over-year, population-weighted basis, housing prices in the 70 cities were up 9.7% (vs. 8.3% yoy in July).
House price inflation accelerated across all tiers in August. In tier-1 cities, August price growth showed a spike to 3.5% month-over-month after seasonal adjustment, the largest price increase since the series started in Jan 2011. (Total property sales in tier-1 cities accounted for around 5% of nationwide property sales in volume terms.) August housing price growth was also at record high levels in tier-2 and 3 cities, with prices increasing at 1.8% mom sa and 1.1% mom sa respectively. The fast extension of mortgages likely contributed to the housing price rally - in August mortgage loans continued to be strong: medium- to long-term new loans to the household sector were Rmb 529bn, vs. Rmb 477bn in July. (see China: August money and credit data above expectations, reflecting supportive policy, Sep 14, 2016) In response to the fast growth of housing prices, many cities (such as Hangzhou, Suzhou, Xiamen, Zhengzhou) have announced tightening policies to curb the rapid price growth.
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Finally, the main reason why tightening measures by local governments are unlikely to rein in prices is that credit remains easily attainable, said Jeffrey Gao, a Hong Kong-based property analyst at Nomura Holdings Inc. “The local curbs have limited impact as home inventory has already fallen to a low level,” Gao said. “Prices will not fall unless the government moves to tighten credit and add more land supply.”
Chinese authorities are facing a monetary policy dilemma amid “rapid” home-price growth, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note Monday. “The overall monetary policy should remain accommodative as inflation remains subdued and growth is still trending down. However, concern about an asset bubble will limit room for further easing.”
And, as we showed two weeks ago, the Chinese housing situation is likely to get even more bubbly in the coming weeks as mortgage loans as a % of total loans, the primary culprit behind the ongoing price surge, continues to rise to all time highs.