More cities record price growth, though overall pace of growth slows.

“June 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 June 2017, 60 of the 70 tracked cities recorded month-on-month (MoM) increases in first-hand commodity residential prices, compared with 56 cities in May. Four cities recorded no change, while six recorded price decreases.

The five cities with the largest increases were: Luoyang (2.4%), Bengbu (2.1%), Beihai (2.1%), Xiangyang (2.0%) and Xuzhou (1.8%)

The five cities with the largest decreases were Sanya (-0.8%), Beijing (-0.4%), Wuxi (-0.3%), Shanghai (-0.2%), and Chengdu (-0.2%).

On average, the 70 cities prices increased by 0.70% in June, the twenty-sixth consecutive MoM increase for the 70 city index. Average prices are currently up 9.59% year-on-year (YoY), and up 23.27% compared with December 2010 when the index was first established.

First-tier city analysis First-tier cities recorded a decline in prices for the first time in 28 months, falling by 0.03% in June compared to a 0.08% growth in May. The only first tier city to record growth was Guangzhou, which recorded a 0.5% growth in prices MoM.

Guangzhou has now recorded 27 months of consecutive MoM increases, while Shenzhen has been hampered by nine consecutive month of no growth which has bought it YoY change to just 2.7%, compared to Guangzhou’s at 17.9%.

First-tier city analysis

First-tier cities recorded a decline in prices for the first time in 28 months, falling by 0.03% in June compared to a 0.08% growth in JuneMay. The only first tier city to record growth was Guangzhou, which recorded a 0.5% growth in prices MoM.

Guangzhou has now recorded 27 months of consecutive MoM increases, while Shenzhen has been hampered by nine consecutive month of no growth which has bought it YoY change to just 2.7%, compared to Guangzhou’s at 17.9%.

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

Out of all city tiers, it was only the first tier cities that recorded a decline in price growth in June. All city tiers recorded deceleration of price growth with the exception of third tier cities which accelerated 6 bps to 0.82% growth MoM.

The four best performing second-tier cities in MayJune were Xi'an (1.7%), Shenyang (1.6%), Chongqing (1.6%), and Ningbo (0.9%).

Six second-tier cities saw a pick up in price growth in June, compared with nine cities in May. The second tier cities with the biggest improvement in growth rates were Chongqing (1.6%, 0.8 ppts), Hangzhou (0.2%, 0.5 ppts), Nanjing (0.0%, 0.2 ppts).

Regional analysis

All regions recorded steady growth in June, ranging from 0.37% to 1.12% month-on-month.

The central and south west regions recorded an acceleration in growth rates and indeed the two highest growth rates in June. Growth rates were supported by a number of the smaller cities such as Xiangyang (2.0%, 1.2 ppts) and Luoyang (2.4%, 1.1 ppts) as well as some of the larger cities such as Chongqing (1.6%, 0.8 ppts).

The central regions have been largely supported by the continued economic growth in the region through significant fixed asset investment as part of the Central government’s Central Plains Economic zone plan. The south west of the country has a significantly lower cost basis of comparison, a steadily growing tourism industry and also may be benefitting somewhat from the increasing integration with South East countries as a result of the One Belt One Road campaign.

Outlook

Overall growth rates for the seventy cities tracked recorded a slowdown in June, despite a broadening of growth to more cities.

Despite slower price growth in 2017 compared to 2016, 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 are not unexpected. Proper enforcement of existingregulations and a review and fine tuning of existing policies is likely to continue. The government’s key aim at the moment seems to be a reduction in the cost of debt and the overall pace of growth of debt. This will undoubtedly have an impact on the market going forwards though the shift in policy at the moment seems to be gradual and the impact is likely to be also.

Bibliography

National Bureau of Statictics.

Savills Research.

Glossary

MoM: Month-on-Month

YoY: Year-on-Year

YTD: Year-to-date