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China's housing market is cooling
This was a sharp slowdown from December 2016's 12.4% y-o-y price growth, based on figures from the National Bureau of Statistics of China. Clearly, tighter government measures in late 2016 have dampened the housing market.
New home prices rose in 57 out of 70 cities. House prices in cities of less-developed provinces actually had the biggest price gains, rather than 1st tier cities, suggesting that the prime cities are cooling first, followed by the provinces.
In December 2017, Beijing saw no price change in prices of first-hand properties from the previous month, while Shanghai saw a meagre 0.2% growth m-o-m. Guangzhou and Shenzhen saw price drops of 0.3% m-o-m and 0.2% m-o-m, respectively.
In contrast, Yunnan province's capital, Kunming, had a 2.6% m-o-m growth in December 2017, followed by Haikou (2.2% m-o-m) in Hainan province, Luzhou (2% m-o-m) in Sichuan province, and Dali (1.5% m-o-m) in Yunnan province.
In Shanghai, the second-hand house price index slightly fell by 0.2% (-1.92% inflation-adjusted) during the year to November 2017, after a 26.87% price increase y-o-y to November last year (24.02% inflation-adjusted), based on figures from Ehomeday.
According to Savills China:
- The average transaction price of apartments declined by 3% q-o-q to CNY 46,536 (US$ 7,417) per sq. m. in Q3 2017.
- The average transaction price of villas, on the other hand, rose by 4.9% q-o-q to CNY 47,682 (US$ 7,599) per sq. m. in Q3 2017.
In Beijing, prices of new homes (including public housing) slightly dropped by 0.9% to CNY 37,800 (US$ 6,024) per sq. m. during the year to December 2017, according to the Beijing Municipal Commission of Housing and Urban-Rural Development.
In Guangzhou, the average sales price of residential units fell by 3.6% y-o-y in Q3 2017 to CNY 19,713 (US$ 3,079) per sq. m., according to the figures from the Guangzhou Municipal Land Resources and Housing Administrative Bureau.
However the average sales price of housing units in downtown areas rose by 11% y-o-y to CNY 37,917 (US$ 5922), while suburban area housing also went up by 9.7% y-o-y to an average of CNY 16,139 (US$ 2,520) per sq. m.
In Shenzhen, the average transaction price of first-hand housing was CNY 54,374 (US$ 8,665), a decline of 7.3% y-o-y to Q3 2017, according to Savills China.
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.
This year, we've found it difficult to collect data, hence the rather disappointing table above. But we have no reason to believe that yields have changed much.
Yields below 3% are a danger signal. We were reluctant to join the chorus warning about a bubble in China in previous years, for the good reason that in 2008, apartments in most large cities in China had rental yields above 5%, a level which we generally consider ‘safe’.
However the year before last we declared that, with that yields of less than 3%, the danger signals were flashing red. We were the first to warn that a crash was likely in the Baltics, and then, our signal was that yields dropped below 3%. We gave similar warnings in Dubai.
So that year we gave the same warning about China – and we believe we were right. It’s not been a exactly a crash, but for sure the period of market ebullience is over. The authorities are in a very difficult situation, and it is hard to know what they will do. But many Chinese property investors are voting with their wallets, and buying properties elsewhere.
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 4.10% to 6.60% of the property value. Most of the costs are shouldered by the buyer, including the 3% 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.
Robust yet slower Chinese economy in 2018The Chinese GDP grew by a robust 6.9% during 2017, following growth rates of 6.7% in 2016 and 6.9% in 2015, according to the National Bureau of Statistics of China.
"It is true that there is a part of the economy — the old economy, heavy industries, property-linked (sectors) — which is slowing deliberately," says Duncan Wrigley, Everbright Sun Hung Kai's chief strategist. "But there are other parts, the new economy which includes services...(and) includes parts of the manufacturing sector, high tech (industries) which are showing strength and that seems to be persisting in this data."
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.
While the IMF noted that the country has made financial stability as its top priority in 2017, the report also stated that there are still underlying causes of risks that should be fully addressed. The IMF recommended that the government should lessen its emphasis on growth targets, which triggers excessive credit expansion at the local level. Other recommendations include the enhancement of financial supervision, and the implementation of policies that could mitigate systemic risks.
China's annual inflation stood at 1.8% in December 2017, slightly up from 1.7% y-o-y in November, based on the figures from the National Bureau of Statistics of China. For the year 2017, consumer prices was up at 1.6%, following inflation rates of 2% in 2016, 1.4% in 2015, 2% in 2014, 2.6% in 2012 and 2013, and 5.4% in 2011.
Urban unemployment fell to a 15-year low rate of 3.9% in Q4 2017, down from 3.95% the previous quarter. In 2017, the number of jobs created in the country also reached a "record-high" of 13.51 million new jobs, according to the Ministry of Human Resources and Social Security.