Is the Chinese property market overheating?

If you look at the basic figures in relation to Chinese property prices you will see a 9.1% year-on-year increase in September against an 8.3% year-on-year increase in August. This measurement takes in 70 of China’s main cities and the figure for September is the strongest increase in property prices across China over the last three years. It is worth noting that the Chinese authorities changed the way in which house price statistics were formulated three years ago.

There is now obvious concern as to whether the Chinese property market is overheating and whether we are in fact in the middle of a property price bubble. On the surface you could easily get the impression that property prices have overheated but if you dig a little deeper what is the real situation?

Property price hotspots

While an increase of 9.1% year-on-year for the month of September is very impressive by any standards it is worth noting that new house prices in Beijing increased 20.6% over the same period, Shanghai saw a 20.4% increase and Shenzhen experienced a price rise of 20.1%. This surge in demand has created a number of property hotspots and in general the Chinese property market is extremely buoyant at the moment.

Quote from PropertyForum.com : “While the economics of China are often shrouded in mystery and intrigue there was some good news overnight with news that the Chinese property sector is attracting interest from investors.”

It will be interesting to see whether Chinese property prices continue to rise in the short to medium term or indeed whether the authorities intervene and introduce a number of restrictive policies.

Will the Chinese government intervene?

Many people may be surprised to learn that the Chinese government has been fairly quiet on the subject of property price increases over the last few months. However, the authorities have been attempting to tackle property price increases since 2010 over which time they’ve introduced a number of “restrictive policies” such as larger mandatory downpayments and home purchase restrictions. So far these have had very little in the way of impact on property prices and demand continues to build.

There is a growing opinion that the Chinese authorities are taking a wider view of the economy and the property market and the fact that income per household in China has increased dramatically over the years. If we look back to 2005 it took the average Chinese household around 10.5 years of income to buy a home although this figure fell to 7.6 years by 2012. This reflects the very changing landscape of the Chinese economy, Chinese household income as well as the buoyant property market.

Will property prices cool in the short term?

While the situation with regards to the Chinese economy and Chinese property market is perhaps not as bad as some people would have you believe, there are already signs that growth momentum is weakening. As a consequence a number of experts believe that slowing monthly increases in property price increases will eventually lead to a period of consolidation which should help to take some of the steam out of the market.

There are also a growing number of new property developments coming online across China, and especially the country’s major cities, which will have a material impact upon supply and demand. This additional inventory will ensure we see limited price squeezes because of a lack of supply and could signal, as we mentioned above, a period of consolidation for the sector.