Momentum slows in higher tier cities but pick up in lower tiers

“May price indices indicate that residential price growth moderated following stricter restrictions in many cities. If this trend persists, the likelihood of new highly restrictive policies should decrease though fine tuning of existing policies may continue.” said James Macdonald, Head of China Research

Overview

In May 2017, 56 of the 70 tracked cities recorded month-on-month (MoM) increases in first-hand commodity residential prices, compared with 58 cities in April. Five cities recorded no change, while nine recorded price decreases.

The five cities with the largest increases were: Bengbu (3.4%), Beihai (3.2%), Zhanjiang (2.6%), Harbin (2.0%) and Shenyang (1.9%).

The five cities with the largest decreases were Haikou (-0.6%), Shenzhen (-0.6%), Hangzhou (-0.3%), Sanya (-0.2%) and Quanzhou (-0.2%).

On average, the 70 cities prices increased by 0.75% in May, the twenty-fifth consecutive MoM increase for the 70 city index. Average prices are currently up 9.68% year-on-year (YoY), and up 22.47% compared with December 2010 when the index was first established.

First-tier city analysis

First-tier cities growth rates slipped to 0.08% in May, primarily as a result of the notable price decrease in Shenzhen, and the slowdown in growth in Guangzhou, though it still remains the fastest growing first tier city.

Once the laggard among first-tier cities, Guangzhou once again recorded the best performance out of all the first-tier cities, increasing 0.9% MoM but at a slower pace from 1.4% in April, 19.5% YoY and 74.39% since Dec 2010 (now higher than Beijing). Shenzhen recorded a deterioration of price growth in May with prices falling 0.6% MoM, a 60 bps deceleration from April.

First-tier cities continue to have some of the lowest levels of unsold inventory, the most vibrant economies and job markets, as well as some of the strongest housing demand. Despite this, increasing unaffordability as well as stricter lending criteria and purchasing restrictions have tempered short-term growth, allowing these markets to consolidate recent home price increases. The key exception to that is the Guangzhou market, which is one of the least expensive first tier markets, having recorded more moderate growth in previous years.

City tier analysis

Price growth improved in city tiers, with fourth tier cities accelerating the most among all tiers. First tier cities recorded the most deceleration in growth rates reaching 0.08% in May, the lowest out of the five city tier classifications.

First- and second-tier cities

The four best performing second-tier cities in May were Shenyang (1.9%), Xi'an (1.8%), Ningbo (1.2%), and Dalian (1.0%).

Eleven second-tier cities saw a pick up in price growth in May, compared with 10 cities in April. The second tier cities with the biggest improvement in growth rates were Ningbo (1.2%, 0.3 ppts), Xiamen (0.3%, 0.3 ppts), Xi'an (1.8%, 0.2 ppts), Tianjin (0.1%, 0.2 ppts) and Shenyang (1.9%, 0.1 ppts).

Regional analysis

All regions recorded steady growth in May, ranging from 0.41% to 0.95% month-on-month.

The north east regions have started to record an improvement in growth rates in recent months after having lagged behind other regions in recent years. The north east has only recorded growth of 7.63% compared to the end of 2010, versus an average of 22.47% for all 70 cities, and only increased 3.79% YoY versus 9.68% for all 70 cities. That said last month the average growth rate for the north east was 0.95%, the highest growth among all regions. All cities in the north east recorded growth or stabilized in prices with the best performers were Harbin (2.0%, 1.5 ppts), Shenyang (1.9%, 0.1 ppts), Changchun (1.1%, 0.1 ppts), Dalian (1.0%, -0.1 ppts), and Jilin (0.9%, 0.2 ppts).

Outlook

Despite a slow start to the year, sales figures in recent months have proved encouraging. Resilient sales performances in the face of government restrictions have emboldened sellers and buyers alike, resulting in a return of growth to the China’s residential market, albeit at more moderate levels than before. It is especially encouraging to see that growth in lower tier cities remains relatively robust and indeed has outstripped growth in higher tier cities in recent months.

While it does not seem like it should be necessary for too many new measures in the near term to curb price growth, policy announcements such as yesterday’s curb on sale and development of commercial titled residential properties are not unexpected. Proper enforcement of existing regulations and a review and fine tuning of existing policies is likely to continue.