Short-term fixes not the answer for Chinese property market

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Over the last few years the Chinese real estate market has been volatile to say the least. On various occasions the authorities have jumped in to increase demand and then been forced to introduce restrictions to reduce demand. This vicious circle is set to continue for many years to come unless the structural shortcomings of the Chinese real estate market are addressed. So, what aspects of the Chinese property market should concern investors in the longer term?

Capitalism and socialism

Whichever way the authorities try to sell the Chinese real estate market the fact is that it is controlled by the authorities with just a whiff of capitalism to attract overseas investors. This halfway house between capitalism and socialism is a very tricky balance to maintain and while some might argue the Chinese authorities have been successful so far, have they?

Perhaps one of the reasons why capitalism even gets a look in across the Chinese real estate market is the fact that it accounts for around 25% of GDP. As a consequence, any significant fall in the property market would have a catastrophic impact upon the Chinese economy and set in motion a very difficult and hard to stop train of events. So, while capitalism obviously goes against the grain with the Chinese authorities it will need to be embraced even more going forward.

Restricted planning permission

For many years now the Chinese authorities have been attempting to restrain growth in property development within the country’s larger cities and towns. In an attempt to push people further into less densely populated areas there have been significantly restrictions on the availability of urban land for property development. However, as the vast majority of employment opportunities are located in and around China’s larger cities and towns this is where demand for property is greatest. This is perfectly illustrated by the massive demand for property in these areas often pushing prices to unaffordable levels – the supply/demand seesaw is well out of balance!

If the authorities backtracked on this particular policy and effectively allowed people to live where they wanted to then perhaps property prices would be more affordable? However, this would mean the release of significant urban land banks for development. A report by the Fitch credit rating agencies perfectly puts into perspective suggesting that 800 million square metres of new housing would be required each and every year up to 2030 to fulfil demand for city properties.

Restrictions on overseas investment

Despite the fact we have seen a significant increase in Chinese investment in real estate markets such as Canada, UK, US, etc the Chinese authorities do not make it easy and there are various restrictions for Chinese nationals. When you consider that 20% of those buying property in China today are doing it for investment rather than homeownership purposes this in itself has increased demand. Recent reports suggest that some areas of the Chinese real estate market may be overvalued to the tune of 30% so something will need to be done to make for a smoother long-term performance by the property market.

Restrictions on investing abroad, restrictions on investing at home and restrictions on the availability of land for development seem to have created significant pent-up demand which is pushing some local real estate markets to very uncomfortable levels.

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