November 1, 2018
News from China only really appears in our mainstream media when something dramatic is happening. When it does feature, it tends to look at topics that the public can easily grasp – such as property – and is invariably bearish. This leads investors here in the UK to have something of a negative bias, even before they start to analyse prospective investments.
When a colleague and I recently undertook a research trip to China, one of our main objectives was to look past the data we analyse and the snippets of insight from meetings and the financial news channels, to gain a better understanding. Here, we present a few observations on the Chinese residential property market and a comparison with the UK.
President Xi Jinping has set China’s agenda on property: that it should be for living in, not for speculation. In aiming to achieve that, the market structure is now moving in a similar direction to that of the UK.
As we know, UK households are highly leveraged in to the property cycle, which can have a dramatic impact on the rest of the economy. Most people assume that the leverage in China, from an individual’s perspective, must be higher; but in many respects, it is more cautious. For example, a first-time buyer in a Tier 1 city must raise a minimum deposit of 30 per cent and for a second home this can be 40 per cent (these statistics vary between 30-40 per cent and 40-70 per cent respectively across Tier 1 cities). In the UK, mortgages tend to pay some attention to leverage but place greater focus on longer-term affordability. The UK has an affordability crisis, which is widely believed to be a result of undersupply, something that is shared with China. Supply in China is a slightly different issue because most, if not all, residential property is built on a pre-sale model with government set price caps; which can still be ten times average salaries (with sales made through a lottery system).
Like the UK, first-time buyers in China bridge some of the affordability gap with the backing of the ‘Bank of Mum and Dad’ – quite significant when you think in the context of the one child policy. The question now becomes: how sustainable is this funding source given the policy has been relaxed?
Like the UK with its consumerism, the local governments in China have an incentive to ignore longer-term affordability and keep the property market moving (land sales taxes can account for the majority of local government income in China and they are trending towards a consumer- led economy). A key point is that, in keeping the market moving, they are not encouraging speculation. ‘Flipping’ is discouraged with capital gains taxes up to 50 per cent for holding periods under two years.
Our overall feeling of the property market was that its structure is moving in the right direction, but it will remain to be seen if the needed house price correction (to help affordability) will be allowed to play out. This is a very similar situation to the UK, which could be a surprise to investors doing a ‘skin-deep’ analysis of investments in China.