How bubbly is the property sector?

How bubbly is the property sector?

House prices in China’s largest cities have risen to elevated levels, whereas smaller cities are faced with oversupply. How worried should investors be? Here are some stunning statistics.

Price to income & loan to value

The nationwide price to income ratio has declined from 10x in 2001 to 7.4x in 2016. Although this is a significant improvement, 30% of the country’s market (particularly tier 1 and 2 cities), with price to income ratios of more than 10x, is in a bubbly state, as can be seen in the graph. The remainder scores healthy on this metric. A favorable development is that high speed rails and urban rail lines encourage people who work in a tier 1 or 2 city to live in these low-tier cities. This will alleviate pressure on property in the big cities and increase demand in the tier 3 and 4 cities, which are faced with oversupply.

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Housing supply

Inventories have declined since 2015. For tier 1 and 2 cities this is not good news per se, as prices have increased so much. As it is difficult to increase supply there, the primary measure for controlling house prices is to restrict home purchases. For tier 3 and 4 cities further destocking is needed to balance the market and improve profitability of developers.

Demand for housing

Demand remains strong, driven by urbanization and an important but often underrated phenomenon: the shrinking average household size. Late marriages, increased divorce rates and aging have pushed down household sizes. Together with replacement demand, this is sustaining the level of new home sales.

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