Economic uncertainty is a restraint on residential investment. Prospective homebuyers with expectations of further declines in house prices would weigh on the demand for housing.
With regard to the supply, financial constraints facing homebuilders could lead to contraction in residential construction. Property developers may also slow down homebuilding activity in response to lower prices they foresee in the future.
Overall, uncertainty about the near-term outlook has increased. The housing demand would weaken further, but the adverse impact could be partly offset by a slowing of construction.
The current downturn may have a few quarters to go before we see some signs of sustainable recovery.
Since the beginning of the year, residential real estate activity in mainland China has decelerated, accompanied by a slowdown in economic growth and a decline in equities. It is interesting to see what factors are affecting the housing demand and supply, and then to assess the outlook for the housing market in the near term.
Developments in the housing market
In mainland China, there are three types of housing: public rental housing, subsidized flats, and private housing. For public rental housing, the government subsidies rental payments or offers public housing units for low-income families. Based on our estimates, less than 1% of urban households live in public rental housing. For subsidized flats, the government provides incentives, such as a waiver of some administration fees, to real estate developers for building units targeted at low-income families. Over the past few years, this type of housing accounted for about 6 to 7% of housing starts or sales volume respectively. That being said, private housing takes the largest portion of the residential property market in the country.
Following a housing reform in the 1990s, the private property market began to expand rapidly. Homebuilding activity maintained a double-digit pace of growth and overall house price followed an upward trajectory. Economic expansion was a major reason for the ongoing growth and development. From 1998 to 2007, the Mainland economy kept a high and stable rate of growth averaging 9.5% per year, resulting in higher household incomes.
In 2005, the government issued guidelines to contain the rapid increase in house prices. One of the steps was to penalize property developers for leaving residential sites vacant for more than a year. Another major move was to impose a business tax on home sellers for selling a property within two years of purchase. The impact of these measures on the housing market was significant. House prices decelerated to an annual growth rate of 6% in the first quarter of 2007, from 11.1% in the fourth quarter of 2004. Fixed asset investments in real estate and residential construction also slowed, in part reflecting homebuilders' lack of confidence in the industry.
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