China: Annual growth in tier 1 new home prices has fallen below that of tier 2 and 3 - Westpac

Elliot Clarke, Research Analyst at Westpac, explains that the China’s August 70-city property price data was telling, being the first time that annual growth in tier 1 new home prices has fallen below that of tier 2 and 3. Authorities’ actions are clearly continuing to have a significant impact.

Key Quotes

“For new housing, annual price growth in tier 1 of 4.8%yr at August is little more than a tenth of its peak level of 31%yr back in April 2016. Growth in each of the tier 1 cities continues to trend down.”

“Prices in Shenzhen are now down 2%yr while Shanghai is up just 3%. Momentum remains stronger in Beijing and Guangzhou (5% and 13%yr), but the pace is slowing there as well. The city-by-city deceleration so far is consistent with the heights scaled: Shenzhen having peaked at 63%; Shanghai and Beijing around 30%yr; and Guangzhou near 24% in mid-2016.”

“Tier 1’s established housing market is carrying a little more momentum, 8%yr. However, that is still a long way from its April 2016 peak of 36%yr. The distribution of gains by city is broadly in line with that of new housing.”

“Tier 2 and 3 price gains have held up better, respectively 7%yr and 9%yr for new builds and around 7%yr for the established market. This is not a surprise given authorities very-targeted approach to curtailing speculation.”

“Related to this point is the breadth of outcomes seen across each tier. For tier 2, annual new home price growth ranges from 0%yr to 13%yr. For tier 3, it is between 1%yr and 16%yr. These results are as much about the economic circumstances each location is experiencing as authorities’ actions.”

“The reaction of developers to continued price gains remains muted. The pace of growth in sales and starts continues to trend down. And, while growth in floor space under construction looks to have found a floor, there is little sign of a new uptrend. Only in tier 1 is there some evidence of a pick up in activity.”

“It is therefore likely that growth in fixed asset investment in the sector will abate further in the second half of 2017 and be modest in 2018. The residential construction sector in China is maturing and under strict regulation. Future growth cycles will be muted relative to history.”