China’s property prices keep falling but remain high

The long-feared real estate bubble burst seems increasingly unlikely to happen in China. For the ninth month in a row, property prices in China continued to decline, falling by 5.1% this year. However, this decline seems to be more and more uneven depending on the cities.

real estate shanghai

Construction site facing the new CBD of Pudong, Shanghai.

If we look more closely, prices fell in 64 of the 70 cities monitored by the National Bureau of Statistics. There were 66 of them last year, revealing a slight price recovery.

The easier access to credit seems to be the key to renewing consumers interest in new homes. Indeed, the recovery came after implementing new credit policy that lowered interest rates and allowed to end twelve months of decline. Thus, Shenzhen, located near Hong Kong was the first of China’s major cities to see a slight prices rise (+ 0.3%) in December 2014. The former Special Economic Zone has been followed in by Ganzhou, a city in Jiangxi province (South-East) where prices increased by 0.2% in January.

Fragile recovery

However, this recovery still seems fragile as prices remain generally stable, especially in large cities. In Beijing, prices dropped by 0.1% in February, as compared to 0.2% in January. As for Shanghai, prices have not varied from month to month, the first time after eight consecutive months of decline. The recovery of Shanghai real estate market still needs to be confirmed with a sustainable price stabilization. Even though China has progressed toward market liberalization last year by lifting controls on purchase and lowering the interest rates, these measures don’t have enough impact to revive the real estate market. Sales, new construction sites and prices are all down.

The situation is similar for already existing properties. Surveys show that prices fell last month in 61 cities compared to the previous month, one more than the total recorded in December. They increased in 6 cities, as compared to 8 in December.

According to an independent study released on Saturday March 7th 2015, the average price of a new home in 100 Chinese cities among the largest of the country fell by 0.25% in February compared to January, to 10540 Yuan ($ 1685) per square meter. According to the China Index Academy firm that conducted the study, prices over one year fell by 3.85% in February, as compared to 3.1% in January.

“February coincides with the Chinese New Year and the companies promotions and price adjustments. This can explain the significant fluctuations experienced by the housing market”, said the China Index Academy firm.

The market should stabilize with the arrival of spring and the small measures taken by the government and that are already anticipated by the market. In the ten largest cities of China, which tend to have the most active real estate markets, new home prices fell by 0.18% year on year to 18960 Yuan.

Only two cities, Shanghai and Shenzhen, are experiencing an increase in property prices over the year. In Shanghai, apartment rents keep rising steadily while China’s yuan fell to its lowest level since 2012, leading to a price inflation. For instance, prices increased by 0.86% year on year to 32300 Yuan per square meter in February.

After almost two decades of soaring prices, 2014 was a turning point for the real estate market that represents 15% of China’s GDP, threatening the country’s growth prospects. All eyes are on the financial health of medium-sized developers, whose failures have raised fears of cascading bankrupts. Some, like China Overseas Grand Groups, announced a decline of 30% of their income in2014. Hopefully 2015 will be a year of recovery for China’s property market.