CASS Warns of Imbalances in Home Prices, Major Correction Coming

Note: the article below discusses rental yields in terms of months, not years.

iFeng: 二三线多城售租比严重失衡 社科院预警房价追高风险

In January 2018, Xiamen had the highest price/rent ratio, reaching a staggering 1100. This means that when house prices and rents remain unchanged, it will take 91.7 years to get back through the rent. If the future rent is converted to the current value, the payback period is even longer. [NPV]

Rental yields in Xiamen and several "hot" cities are lower than first-tier yields:

On May 14, the Academy of Social Sciences issued a real estate blue book “China Real Estate Development Report 2018”. The report shows that in January 2018, the median housing price in Xiamen reached more than 37,000 yuan per square meter, which has surpassed that of the first-tier city of Guangzhou, and the median housing price in Hangzhou, Nanjing, and Tianjin is more than 28,000 yuan per square meter. The difference between Guangzhou and Guangzhou is only one or two hundred yuan per square meter. If we look at the price-to-rent ratio, in January 2018 Xiamen, Langfang, Huizhou, Shijiazhuang, Hefei, and Nanjing all surpassed first-tier cities.

CASS sees a "major correction" coming because lower-tier city prices are rising while the first-tier has already peaked:

These data show that many second- and third-tier cities have increased their real estate risks. The blue book mentioned above holds that there is a huge risk that property prices in many second- and third-tier cities will rise too fast. To this end, buyers should pay attention to avoiding chase. As the growth rate of housing prices in first-tier cities continues to be lower than that of second-tier, fourth-tier cities, the spread between first-tier cities and second-tier, fourth-tier cities will be reduced.

"With the gradual withdrawal of destocking incentives and the tightening of controls, it is expected that there will be a major correction in the third- and fourth-tier cities (real estate) market in the second half of 2018." May 14, China Social Science Wang Yeqiang, director of real estate office of the hospital city, said at the above conference.

Rental yields only make sense if home prices are rising:

Langfang, which has a price/rent ratio over the first-tier cities, reached 883. Huizhou, Shijiazhuang, Hefei and Nanjing were 844, 824, 746 and 653 respectively.

From the first-tier cities, the ratio in Shanghai is 644, Shenzhen is 627, Guangzhou is 600, and Beijing is 594. According to a simple calculation, in Beijing, which has the lowest housing price and rental ratio in the first-tier cities, the rent is back to the current period of 49.5 years, and the annual rental yield is about 2%. Suzhou, Qingdao, Jinan and Tianjin surpassed Beijing.

According to the article I recently posted here, the average mortgage rate across China was 5.51 percent in March. Without price appreciation and without considering the eventual introduction of real estate taxes, the payback period is infinity. Rent won't cover the mortgage, let alone maintenance.

Assuming strong wage growth and high rates of GDP growth one can make the housing bubble disappear or at least deflate it considerably on a long enough time horizon. The shorter the time frame, the more the Chinese housing market is priced for perfection.

Here's a less inflammatory headline covering the same CASS report at iFeng: 楼市接下来怎么走？社科院预测房价全年平稳回落 (The property market next how to go? The Academy of Social Sciences predicts that prices will fall steadily throughout the year) Reminds me of the stock market articles in the USA noting the low level of the VIX. "Don't worry, it's an orderly bear market."

iFeng: 社科院发布“房地产蓝皮书” 今年楼市调控以“稳”为主

English coverage

Reuters: China's property market to steadily cool in 2018 - government think tank

But China’s property bubbles are still “relatively big”, said Ni Pengfei, a senior researcher with CASS, stressing that current market stability is just a “short-term equilibrium” with market sentiment being particularly “fragile”.

Some major cities may need to roll out more price cooling measures this year, it added, while lower tier cities will likely phase out stimulus policies or even tighten the market to stabilize prices.

This won't help rental yields:

The think tank also advised the government to levy taxes on empty homes in an effort to boost rental supply.

CASS at end of 2017: China's property market to cool in 2018: think tank