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Hao Zhou, Senior EM Economist at Commerzbank
Have China’s property prices peaked?
- China’s property market has shown slowing momentum as the authorities tightened policy.
- If history is any guide, we believe that the year of 2017 will be a tough one for the property market.
- Of course, given the importance of the property market to China’s economy, the overall growth profile may come under pressure as well.
- But a healthy development in property markets is crucial for long-term prosperity.
Property prices losing momentum...
Since October 2016, Chinese authorities have tightened property policies. Thereafter, the housing transaction volume in the big cities has fallen by double-digits on a year on year basis. As a result, property prices have gradually lost momentum, led by the first-tier cities. Housing prices in first-tier cities were flat on a m-o-m basis in December 2016 (Chart 1), the slowest growth since Q1 2015. In the meantime, while the overall property price index is still on the rise, property year-on-year prices in first-tier cities have started to turn around (Chart 2). As housing prices in big cities normally lead the performance of the overall price index, we believe that property prices in China are about to peak.
A typical downward cycle?
How long will the current slowdown last? In order to answer this question, we need to look at the historical performance of China’s property market. Surprisingly, China’s property market is quite cyclical. Since 2005, the property market has witnessed three cycles, and the average downward cycle (from peak to bottom) is about 17 months. That said, if history is any guide, China’s property market will likely remain soft for the whole of 2017. (Chart 3)
Growth under pressure
Clearly, growth would be under pressure amid a property slowdown, implying a rocky road ahead for China’s economy. Since 2010 to 2015, China’s housing investment slowed significantly, which had dragged down economic growth by a large margin. (Chart 4)
However, as the housing investment had not picked up strongly in the past few quarters when property prices were soaring, we think that overall supply and demand conditions won’t deteriorate dramatically. Against a backdrop of both a property market and economic slowdown, we think that overall inflationary pressure for the whole economy remains manageable. That said, the risk of outright monetary policy tightening can be largely discounted as well.
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