China's house price boom over in the 1st tier cities
Maria de Guzman | August 19, 2019
In June 2019, new home prices went up in 63 out of the total 70 cities, down from 67 cities in May, based on the NBS survey. Most of the price gains were felt in the second and third-tier cities, while the four top-tiered cities had weaker price growth, with an average increase of 0.2% on the previous month.
"The drop in growth reflects the growing expectation of more tightening measures to come. As many as 251 real estate restriction policies were announced in the first half of this year, 31% more than the same period last year," said Centaline Property Agency Ltd.'s chief analyst Zhang Dawei.
Among the four top-tier cities, Shenzhen saw the highest house price rise in June 2019, with house prices increasing by 0.5% on the previous month. Shanghai and Guangzhou both saw a 0.3% m-o-m growth. In contrast, Beijing saw a slight drop in prices by 0.1% from the previous month, according to the NBS.
In Shanghai, the second-hand house price index barely rose (up by 0.08%, or -2.5% inflation-adjusted) during the year to June 2019, an improvement from the 1.8% y-o-y (-3.5% inflation-adjusted) price decline in June 2018, according to Ehomeday.
According to Savills China, in Q2 2019:
- In Beijing, the average price of high-end apartments rose by 0.7% q-o-q and by 5.3% y-o-y to CNY 96,915 (US$ 13,780) per square metre (sq. m.). The average price of high-end villas increased by 0.3% q-o-q and by 2.7% y-o-y to CNY 72,070 (US$ 10,247) per sq. m.
- In Shanghai, the average transaction price of first-hand mass commodity residential housing fell by 4.1% q-o-q to CNY 54,200 (US$ 7,707) per sq. m. in Q2 2019.
- In Shenzhen, the average transaction price of a first-hand residential housing rose by 1.3% to CNY 55,632 (US$ 7,910) during the year to Q2 2019. However, prices were down by 3.6% q-o-q.
- In Guangzhou, the average sales price of residential units increased by 5.9% q-o-q to CNY 28,937 (US$ 4,114) per sq. m. in Q2 2019.
Rules on who can purchase property
Foreigners who have worked or studied in China for at least a year are allowed to buy a home. Foreigners go through supervision procedures which last about a week, before they are allowed to buy properties in designated areas.
Foreigners cannot be landlords. Property ownership for investment by foreign companies and individuals is prohibited. Chinese living overseas and residents of Hong Kong and Macau are exempt from these restrictions.
There is no private ownership of land in China. One can only obtain rights to use land. A land lease of up to 70 years is usually granted for residential purposes.
Chinese yields still very low
When we first began to gather data on China, gross rental yields in all categories of Beijing condominiums were above 9%, and gross rental yields for villas in Beijing ranged from 9.5% to 13%. In Shanghai, returns were less stellar, with gross rental yields on apartments ranging from 5.4% to 7%.
Last year, we found that rental yields on almost all sizes of apartments in Beijing were below 2.5%, and in Shanghai below 3.2%. It is hard to escape the fact that prices have been climbing steeply, while rents have not moved much. Until 2008, apartments in most large cities in China had rental yields above 5%, a level which we generally consider ‘safe’.
Yields below 3% are a danger signal. The Global Property Guide were the first to warn that a crash was likely in the Baltics in 2007. Then our signal was that yields had dropped below 3%. We gave similar warnings in Dubai.
China however is different. Although the Chinese property market is cooling, a crash in China is unlikely because of the firm hold that the authorities have on the financial system, and there are a raft of measures that the authorities can take very swiftly to encourage people to buy.
However many Chinese property investors are voting with their wallets, and buying properties in other countries. Increasingly this is causing Chinese authorities to try to stem the outward flow of money, and causing host communities to say enough is enough, for instance in Australia and New Zealand.
Taxation differs in each municipality in China
Rental Income: In general, leasing property is subject to business tax, individual income tax, and real estate tax. In Shanghai, gross rental income is taxed at an integrated rate of 5%.
Capital Gains: Net gains from transfer of property are taxed at a flat rate of 20%.
Inheritance: There is no inheritance or gift tax in China.
Residents: Rental income earned by resident individuals is taxed at a rate of 10%.
Buying costs are moderate in China
Total round-trip transaction costs are around 6.10% to 8.60% of the property value. Most of the costs are shouldered by the buyer, including the Deed Tax.
Chinese law is pro-landlord
The Chinese system is generally pro-landlord.
Rent: There is no rent control in major centers such as Beijing, Shanghai, Guangzhou, and Shenzhen. Rent adjustments are subject to the provisions of the contract.
Guaranty Money: The landlord typically collects guarantee money (security deposit) of two to three months rent on top of a month's advance payment. If the tenant prematurely terminates the contract, he loses the guarantee money and down payment.
Slower economic growth in 2019In Q2 2019, China's economy expanded by around 6.2% y-o-y, down from 6.6% in 2018, and the country's weakest growth since the National Bureau of Statistics of China (NBS) started publishing quarterly GDP data in 1992. While the government continues to implement a fiscal stimulus to support domestic demand, these efforts were overshadowed by the current trade war's negative spillovers not only on exports, but as well as investments.
"Uncertainty caused by the US-China trade war was an important factor and we think this will persist, despite the recent tariff truce," according to The Economist Intelligence Unit's principal economist for China Tom Rafferty. "Businesses remain skeptical that the two countries will reach a broader trade agreement and recognise that trade tensions may escalate again."
From an average growth rate of 12.7% annually from 2005 to 2007, China has experienced a slowdown in recent years, with an average annual real GDP growth rate of 8.4% from 2008 to 2016. In 2017, China's economy expanded 6.8%, up from 6.7% in 2016.
Despite slowing economic growth in 2018, China still managed to contribute around 30% to the world's economic growth, according to NBS bureau head Ning Jizhe. Ning noted that the "slowing but stabilizing" economy was not an easy feat, as the country faced several headwinds in 2018 such as unilateralism, increasing protectionism, severe fluctuations in bulk commodity prices, and weak global demand.
In 2019, China's economy is expected to slow down further to 6.2%, according to the IMF. "The near-term outlook [of the Chinese economy] remains particularly uncertain given the potential for further escalation of trade tensions," according to iMF's first deputy managing director David Lipton.
The US-China trade war began in 2017, when the US started to investigate China's alleged unfair trade practices. This led the US to imposing tariffs on 128 Chinese products in April 2018, and it has been imposing more tariffs since then. Meanwhile, China retaliated by imposing tariffs on US goods. In 2018, the US imposed tariffs on a total of US$250 billion worth of Chinese products, 46% of all Chinese goods imported into the US during that year, according to the US Census Bureau and BBC research. China, on the other hand, imposed tariffs on US$ 110 billion worth of US products, almost 92% of the total US goods imported into China in 2018.
The tension between the two countries escalated further when Chinese tech giant Huawei's chief financial officer Meng Wanzhou, was arrested in Vancouver in December 2018. The executive faces 23 criminal charges and was accused by the US authorities in covering up Huawei's violations of US sanctions on Iran. A few months prior, the US enacted the National Defence Authorisation Act, which bans the use of Huawei and ZTE products due to potential security risks.
The two countries agreed to a "truce" in the trade war during the G20 Osaka summit in June 2019. In their agreement, the currently imposed tariffs will still be effective, but no further tariffs will be imposed "for the time being", while the two countries restart their negotiations.
China's annual inflation rose by 2.7% in June 2019, according to the NBS. Urban unemployment in China was at a historic low of 3.61% at the end of the second quarter, down from 3.67% in the previous quarter, according to the NBS. During the first half of 2019, the number of urban jobs rose by 7.37 million, reaching around 67% of this year's official jobs target.