China’s real estate market has grown immensely the past years and accounts for 30% of the total GDP. We’ve seen both ups and downs in the market, with a big correction in 2015-2016.
With an economy that has slowed down, and with an escalating trade war with the US, it will be interesting to see how the market is set to perform in 2019.
In this article we take a look at how China’s real estate market has performed the past years and what my predictions are for 2019.
How has China’s real estate market performed the past years?
China’s real estate market is one of the fastest growing in the world and a main driver of the Chinese economy. As prices have surged since the 2000s, setting foot into the housing market has become popular to gain wealth.
Many of the luxury goods and sports cars you see in places like Shanghai (I’ve seen plenty of them) are bought with money made from real estate.
According to the National Bureau of Statistics, first-tier and second-tier cities like Shanghai, Shenzhen, and Beijing have seen higher increases of residential house prices.
To give you an overview, I’ve listed the average real estate prices in RMB/square meter from 2013 to 2016 below. The numbers speak for themselves.
Shanghai real estate prices (RMB / Square meter)
- 2013: 16,192
- 2014: 16,415
- 2015: 21,501
- 2016: 25,910
Beijing real estate prices
- 2013: 17,854
- 2014: 18,833
- 2015: 22,633
- 2016: 27,497
Shenzhen real estate prices
- 2013: 23,457
- 2014: 24,040
- 2015: 33,661
- 2016: 45,498
Guangzhou real estate prices
- 2013: 13,954
- 2014: 14,739
- 2015: 14,083
- 2016: 16,346
Impressive growth in Shenzhen’s real estate market
Many of us have the impression that Shanghai and Beijing have the highest property prices on average. Let’s think again. Shenzhen has outranked these cities with prices growing immensely the past years.
Many people in the West haven’t even heard about this dynamic tech- and financial hub that becomes increasingly important to China as a whole.
It’s one of the major financial hubs in China, closely tied to Hong Kong and with favorable policies.
Interestingly, Shenzhen was one of the first Chinese cities to open up to the foreign world in 1978, thanks to Deng Xiaoping. It grew with an astonishing rate of 40% per year from 1981 – 1993.
Cooling measures in Beijing’s real estate market
The Chinese government has realized the fast-growing house prices and investors’ love in the real estate market. Therefore, it saw no other choice than to introduce new measures to cool down the market.
The most notable change came in March, 2017. The difference has been night and day since, with Beijing being affected the most.
Some of the changes with the new housing regulations includes:
- Down payments increased from 50% to 60% for second residential houses
- Down payments increased from 70% to 80% for bigger homes
- Individual mortgages for 25 years, or more, were suspended
- Buyers were banned from acquiring a third property
The main goal behind these changes was to encourage buyers to live in their houses, not simply buying them as investments. The fact is, many Chinese investors and private households prefer to invest in real estate instead of stocks as they put little trust into the stock market.
The Chinese turn their backs to the stock market
According to CNBC, Chinese households put 2/3 of their assets in real estate, while Japanese people only put around 1/3 of their assets in real estate.
Why is this the case? The main reason is that investors in other countries tend to invest more in stocks. Simply speaking, the Chinese don’t trust their domestic stock market.
It’s too volatile and individual holders account for 80% of the trade volume in the Shanghai stock market, for example.
These individuals often collectively “panic-sell” based on rumors and chase short-term gains. You’ve probably read about the Chinese stock market crash that went on from 2015-2016.
The market crashed hard during this time and speculation among locals was mainly to blame.
During the years I spent in China, I heard stories from several close friends, how they lost hundreds of thousands of RMB when allowing “friends of friends” to invest money in penny stocks. It was a frenzy.
Cooling measures in Shanghai, Guangzhou, and Shenzhen
Other big cities like Shanghai, Guangzhou, and Shenzhen implemented new buying regulations just months after Beijing.
One year later, in March 2018, we could see an effect as the market cooled down and prices dropped by double digits in places like Beijing.
In July 2018, the China Research Index showed that the number of sold houses decreased by 10% from the previous year. One month later, Shanghai and other cities announced the ban for corporate purchases of residential houses.
On the real estate developers’ part, the construction sector has also slowed down, mainly because of the slowed demand and reduced amount of transactions.
In addition, developers have restrained from building new houses as they have a lower inflow of cash and are unsure about the real estate market in general.
How will China’s real estate market perform in 2019?
The government continues to keep a tight grip of the real estate sector, especially in the first-tier cities (read: Shanghai, Beijing, Shenzhen, and Guangzhou)..
By May 2018 the government had announced more than 100 housing measures. We’ve seen a shift in the growth to third-tier and fourth-tier cities, that are less restricted.
This trend will continue and China will closely monitor the real estate market in the first and second-tier cities.
As mentioned, real estate accounts for around 30% of China’s GDP, at the same time as two thirds of the Chinese keep their assets in the real estate sector.
Consequently, houses are crucial for both the Chinese economy and for the people.
The Chinese government do its utmost to avoid a real estate market crash, as it may drag down the whole economy. Chinese families may lose big parts of their savings, resulting in reduced purchasing powers.
We will most likely see a minor correction reaching up to double digits in 2019, where the government will play a big role in monitoring the market.
The impact of the trade war with the US
Even if the Trump administration announced a trade war against China in 2018, where both countries increased tariffs on imports, the domestic residential market haven’t been affected much.
Knight Frank UK shared an interesting line: the domestic residential market is mainly driven by local demand and this demand is driven by government-run urban redevelopment. Therefore, property prices and transaction volumes of residential real estate seem to be less affected by the trade war.
There’s been no visible impact on commercial properties either. The demand for office space from tech companies and multimedia companies remain strong.
China is almost halfway in urbanizing the country, and one of the most important parts in its urbanization are infrastructural developments and to construct new buildings.
As mentioned earlier, the demand has surpassed the demand. Therefore, some analysts believe that the supply won’t meet the demand, which might keep the market above the surface, or even drive up prices more.
The Chinese real estate market has grown immensely the past years, but started to cool down after the government introduced new regulations in 2017.
The market is still hot, with increasingly more activity in third-tier and second-tier cities, as the government has imposed new policies in mainly first-tier and second-tier cities.
Real estate accounts for 30% of China’s economy and the government will continue to closely control the market with regulatory measures. A real estate market crash would affect the market badly.
It’s difficult to predict the outlook in 2019 as some analysts believe that the market can drop as much as 10-15%, but we still see a strong demand among local buyers.
One thing is for sure, we should be cautious and the real estate market will most likely see a correction, with (moderately) falling prices in 2019.
Other China Property Guides
- How to Buy Property in China: A Complete Guide
- Buying Property in Shanghai: The Basics You Need To Know
- Top 10 Property Developers in China: A Complete Guide
- Buying Property in Guangzhou: The Basics You Need to Know