China real estate crash is worse than official data
China real estate crash is worse than official data

China’s real estate market has shown surprising resilience, despite tepid economic growth and record-high developer defaults, according to official Chinese statistics.

New house price has slipped and fell Government data showed a decline of just 2.4% from the August 2021 high, while existing homes were down 6%.

But the situation for realtors and private data providers is far more dire.

The figures show existing home prices have fallen by at least 15 percent in prime locations in major metropolises such as Shanghai and Shenzhen, as well as in more than half of China’s second- and third-tier cities. Existing homes near the Hangzhou headquarters of Alibaba Group Holding Ltd. are down about 25% from their highs in late 2021, according to local agents.

While like-for-like comparisons are hard to make, industry insiders and economists say China’s official house price index may be underestimating the depth of the recession, in part because long-standing methodologies have struggled to capture market turning points.play video

This exacerbated investors’ concerns about China’s ability to get timely economic data, which is not available in China. some information Under President Xi Jinping, such restrictions have become stricter. It also raises questions: Do policymakers have an accurate understanding of the market when formulating measures? support Require. Another risk is that cautious homebuyers stay on the sidelines, waiting for data to show price falls before stepping in.

The approach, which relies in part on surveys rather than price data from transactions, helps authorities smooth trends and avoid wild swings, analysts said.In the US, by contrast, the widely cited S&P CoreLogic Case-Shiller index use House price data collected at local deed recording offices across the country.

For Henry Chin, who has spent more than 20 years researching global real estate markets, the provenance and accuracy of data is critical.

Chin, head of Asia-Pacific research at CB Richard Ellis, said: “The housing price data in many countries is based on the total transaction volume of the market, while China uses a selective sample. When the market falls, the real market conditions are difficult to predict.” Reflected in these data. “

China’s National Bureau of Statistics said in a statement online explanation The raw data for new home prices is based on all sales and purchases registered with local housing exchanges. However, existing home prices are based on sales and surveys of key items, the report said. The ONS uses the Las Perez Price Index, a formula commonly used around the world, to calculate house price indicators in 70 cities, the ONS told Bloomberg. The methodology for sampling and index calculation remains unclear, market watchers said.

Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, said the survey-based data “are designed to avoid extreme volatility”. “However, the data defeats the purpose of itself when people stop buying in fear of further price falls.”

Economists at Goldman Sachs Group Inc. said in a July report titled “Understanding Differences in Measures of House Prices in China” that this partly explains why changes in house prices suggested by official and private sources appear to be in some cases in line with The market is not in agreement.

Unlike much of the world, Chinese authorities do not publicly disclose house prices after deals have settled. In 2021, the ONS responded to concerns about the official house price index, saying it was able to “generally” reflect changes in supply and demand in the property market. statement on its website.

price slide

In Hangzhou, near the home of Alibaba’s headquarters, prices in some neighborhoods have fallen by 25% to 28% from their peak around October 2021, agents said. In the downtown Lianyang district, popular with Shanghai’s expats and financiers, home prices have fallen 15% to 20% from record highs in mid-2021, they said.

Even as of March, in new slowdownEconomists at Guolian Securities wrote in a report citing data from Keyi Holdings, a service provider for existing home transactions, that more than half of second- and third-tier cities saw existing home prices drop by more than 15% from their peak. Economists warned that the spike could be sharper because the agency only started compiling data in November 2018.

Larger cities, once thought to be able to withstand a housing downturn, have not been immune. Existing-home prices in at least five hotspots in Shenzhen have fallen 15 percent over the past three years, according to a July report by property research group Leyoujia.southern hub is national cheapest real estate market.

Goldman Sachs China economists led by Wang Lisheng wrote in a July report that all data sources in China, whether government or private, face “significant challenges” in compiling a relatively stable portfolio to track house prices. “. In their assessment of China’s house price indicators, they said “there is no such thing as a perfect” indicator.

“As China’s economy continues to recover after reopening, weakness in real estate is likely to be the most challenging headwind to growth, so momentum and sentiment in the real estate sector have a significant impact on growth and policy,” Wang wrote. House prices deserve more attention in the tug-of-war between downward pressure on the economy and growing easing hopes.”

The gap in perceptions of house prices stems in part from the large number of policy levers the authorities have. While countries like Australia, Singapore or the US tend to tighten loan-to-value limits or raise interest rates, China can go beyond that by banning anyone not born in a particular city from buying a home or limiting the number of properties a person is allowed to own.

“Weakness in house price statistics doesn’t make things any better,” said Bert Hofman, now a former World Bank China director at the National University of Singapore. This “may now be detrimental to identifying the right policy to stabilize markets.”

first home

The Chinese government also intervenes directly in prices. Since most new homes in China are sold before they are built, the regulatory cap on these projects creates a distortion. through a “pre-sale Allowed”, the local housing department sets the price at which developers intend to sell properties.

Since 2016, this approach has managed to keep prices of new homes in big cities roughly flat after home purchases. crazy, even as existing home values ​​continue to soar. Then, when prices started to fall, the arrangement helped reduce the decline in new dwellings despite a severe economic slowdown.

“The price gap has become a huge distraction for correctly interpreting the domestic market,” said Yan Yuejin, research director at E-House China Research Institute. “Some of the hot new projects give the impression that the market is hot, but in reality some suburban projects are really hard to sell.”

existing residence

Existing home prices have also been distorted in recent years, Goldman Sachs analysts said. Since 2021, the governments of more than a dozen major cities have established so-called ” “Reference Rate Mechanism” For the existing housing market, government-guided prices will be used instead of market prices to cool down the housing boom.

Added to this is the long-standing practice of entering into separate contracts for lower existing home prices for tax purposes, artificially keeping official transaction prices lower than they really are.

Guo, a real estate agent in Shanghai, said real transaction prices were hard to come by. Guo asked to be given only his surname because of the discussion of sensitive issues. He added that transaction data often reflected the artificially low prices buyers and sellers presented to authorities, rather than actual transaction prices.

A housing market in which the accuracy of information is questioned could discourage buyers and could mean that future policy responses are less certain.

“Beijing has taken some measures to ease tensions in the property sector, but too slowly and too little,” said Lu Ting, chief China economist at Nomura Holdings Inc. More steps to stop the vicious circle . “

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