News in Charts: China’s high house prices pose a threat to social stability

Fathom Consulting has created a wealth of proprietary indicators which provide unique insight into an economy, many originating from bespoke consultancy projects. The measures captured in the charts below are available on Refinitiv’s Datastream Chartbook, under ‘06. Fathom’s Proprietary Indices’.

China’s increasingly unaffordable property values have priced millions of Chinese people out of home ownership, challenging age-old marital traditions. Problematically for Beijing, high house prices not only pose a threat to social stability, but to financial, economic, and political stability too. The challenge for China’s policymakers is to reduce that threat prior to the bubble bursting.

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A typical household in China currently needs to save all its disposable income for 18 years in order to pay for an average-sized house: that is more than double the UK and US’s average house price-to-income ratios. Shanghai, Beijing and Zhejiang are notably less affordable than elsewhere, with ratios in excess of 40 years.

In a market economy, these lofty price tags would be a consequence of excess demand over supply. But China is not a proper market economy. Property prices are allowed to fluctuate to a degree, but as local authorities own the land, and income from land sales are worth nearly as much as official local government revenues, the desire to sustain prices is strong.

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Policymakers at central government level are also reliant on the housing market as a tool of economic policy. Some estimates suggest that when other related spending is included, China’s housing market could account for as much as 17% of the economy — reason enough to fear bursting the property price bubble.

This has resulted in a series of on-off policies, as Chinese officials juggle the social implications of ever-rising prices while trying to avoid a housing market correction (or collapse). Problematically, the implicit price guarantee this creates has encouraged massive amounts of leverage in the real estate sector, rendering local authorities and property developers increasingly vulnerable to a price correction. The higher that house prices go, the further they may fall, and the greater the threat to financial, economic and political stability.

Property price inflation slowed through 2019 to mid-2020 as the Chinese government intervened to cool the market, with COVID-19 merely extending that downward trend rather than causing a discernible impact. However, that looks set to change, with all the measures in the chart below pointing to a bottoming out of the recent downward trend, or even a quickening of house price inflation.

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The driver behind this change is supply — policymakers’ preferred instrument to prop up prices. A key policy tool used to manipulate supply is to order the mothballing of properties. That means extending the time it takes to complete building them, and refusing to certify them as ‘vacant’ even when they are complete.

The result of this is that an average residential building project in China now takes more than eight years from start to finish. Consequently, ‘mothballing’ enables the authorities to create a perceived shortage, limiting the supply of ‘completed’ housing and pushing up prices.

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The degree of slack in China’s housing market is set to rise further if data on construction-related sales and output are anything to go by. While state intervention will no doubt protect local authorities and property developers, it does little for the millions that are being priced out of the real estate market.

In the years ahead, China’s policymakers face the unenviable challenge of reducing the risks associated with the housing market while attempting to preserve its sizeable contribution to economic growth. While the intention may be to reduce those risks before allowing a correction, this approach merely reinforces the implicit price guarantee which has helped foster much of this behaviour in the first place. All the while, China’s housing bubble is at increasing risk of bursting.

For more charts on this topic, visit the new, hot topic folder on Refinitiv’s Datastream Chartbook,  ‘04.04 HT – China’s housing market’.

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