The Chinese Housing Market
What’s all this talk about the Chinese housing market? And more importantly, should you invest?
According to Reuters, China’s average residential property prices are forecast to rise just 0.5 percent for the full year. At least their market isn’t going down!
Things have changed fast. In early February 2018 Yolande Barnes, Director of Savills World Research, was talking about China’s domination of House Price Growth.
According to Savills, London had done OK, increasing by 47.7% over the 5 year period leading up to Dec 2017, but other places had done better. During the same period, San Francisco increased by 81.1% and Dublin by 79.9%.
In fact, a lot of familiar cities had better returns than London including Vancouver 69.6%, Sidney 61.8%, Los Angeles 60.3% and New York 60.2%. However, if you really wanted to see good returns you needed to go a little more exotic.
Western housing market vs Chinese housing market
The Chinese housing market blew the west out of the water. House prices in five Chinese cities increased by over 100% over the 5 year time period in question. Shenzhen led the way with growth of 160.5%.
There’s always a lot of talk about ordinary Londoners being priced out of the local market, and that’s no surprise because the price to income ratio according to Numbeo is 22.19. This means houses cost the equivalent of 22 years annual income. That’s a lot for anybody to stump up.
However, at the same time, it is nothing compared with what Chinese buyers are prepared to pay for Chinese property. The top four price to income ratios at the time of the research were all in China: Beijing 48.13; Shanghai 42.84; Hong Kong 41.08; and Shenzhen 40.29.
Experienced investors will be thinking those kind of numbers have bubble written all over them. That may be the case, but is it really so clear cut?
How expensive is expensive?
Even with the exceptional growth, the average price of a house in Shenzhen was still only $880 per square foot, compared to $1,020 per square foot for London. In fact, only Hong Kong was more expensive than London at $1,430 per square foot.
The biggest increase in price in 2017 was in Chongqing, where the house price increased a whopping 58.9% in one year, but the typical price per square foot there was just $170 m per square foot.
What drives property prices?
So what drove these massive price increases? The fact that the Chinese stock market was still down 40% from its high 10 years previous may mean Chinese feel a lot safer investing in property than investing in the stock market. Furthermore, with the economy growing so fast it has got to be almost impossible to find a savings rate that is going to beat inflation. It is likely that many Chinese see no alternative to investing in property.
It is also worth noting that the Chinese seem to value home ownership even more than the British. Not sure how “an Englishman’s home is his castle,” translates into Chinese, but I am sure the Chinese must have a similar saying. A massive 90% of Chinese own their own homes, compared with just 63.5% in the UK.
The crazy thing is that most people buy houses without a mortgage in China. Only about 18% of home owners in China have mortgages compared with just under half of homeowners in the UK.
It seems counter-intuitive that the prices can be so high compared with income and yet mortgages aren’t required. The fact is that in China families don’t think twice about clubbing together to make a house purchase. It is almost expected that both sets of parents will make large contributions towards the cost of a house for young Chinese couples.
Investing in China’s housing market
For anybody with an eye on investing in the Chinese housing market, the good news is Chinese property transactions are pretty straight forward. It is not like the UK where it can sometimes takes years to buy a house. Buying a house in China can be completed in a couple of weeks.
The bad news is that because both parties need to be present at the relevant government department to complete a transaction. You actually have to go to the place where you buy the house!
Having said that, I can think of worse things to do than spending a couple of weeks in China looking at properties to avoid the UK winter weather!
More articles on property here.
