Real Estate Boom in 1st-tier Cities – A bubble or a norm?

(Photo: Crowd in Shanghai’s property exchange centers, source:

Here is a Nobel Laureate-level question for you to answer : “Most listed companies in China have less net profit than the equivalent price to buy one single mansion in Beijing/Shanghai/Shenzhen. But selling 1% of the company’s stock will enable the management to buy several mansions. Please testify which bubble is more significant?” Though the question has been widely circulated on China’s wechat and other social media platforms recently, it is tough to find a reasonable answer to it. This sarcastic joke, however, is clearly alluding to the recent rampant surge in secondary home sales in mainly Shanghai and Shenzhen.

Surge in property price mainly in 1st-tier cities, i.e. Shanghai & Shenzhen

Since early 2015, Shenzhen has seen its property price risen dramatically. Most market participants believed it to be consistent with the policy carried out last March by the central government, which has loosened the down-payment ratio of second-time home buyers from 60% to 40%. Tax policies were also relaxed simultaneously, where applicable tax exemption period of secondary property transfer has been shortened from 5 years to 2 years (selling a house after owning it for more than two years will be exempt from sales tax) . Since then, both price and volume have picked up dramatically in Shenzhen – in 2015,  140,000 properties in Shenzhen have changed its owner, up 109.6% YoY according to Soufun. Shenzhen’s property price has risen by 43% YoY, according to National Bureau of Statistics. Leverage has also gone up,  outstanding mortgages in Shenzhen have increased by 40% YoY to 742 billion RMB. Average mortgage as of total transaction volume was 65%, significantly higher than that of Beijing, Shanghai or Guangzhou. There are also alternative ways to lever up – P2P platforms and financing companies can help individuals increase their leverage to less than 10% of down-payment, a sign of significant financial risk going forward.

(Shenzhen’s property sales was normally held in a sports stadium, source:


Shanghai has been a latecomer in the property price race. Property price growth in 2015 was at low double digit (much lower than Shenzhen) and there hasn’t been much sign of a boom. Yet in the first two months of 2016, especially late February, long queues and fully-armed police forces have been frequently seen in property exchange centers all across Shanghai. It’s a deja vu for those who have experienced the 2015 stock market boom, but the actual buying fervor was more than extreme – contract breach by sellers have been the norm, as prices have been trending upwards on an hourly basis. “Panic-buying” has been prevalent, and this is literally a sellers’ market. The main trigger for such “panic-buying” was mainly attributed to the cancellation of the deed tax on property, also applicable to cities with purchase restrictions, such as Shanghai. Deed tax on property has been as high as 3-5% of total transaction volume, based on the size of the property. Now it has been curtailed to under 2%, and only 1% if your property is less than 90 square meters of size.

(Soufun’s data shows average secondary property prices have gone up dramatically in Shenzhen since early 2015, and Shanghai at the beginning of 2016)


Shanghai’s outstanding mortgage is also trending upwards – mortgage volume alone in January 2016 (46 billion RMB) has been equivalent to the volume during first half of 2015, according to PBOC Shanghai branch. Secondary transaction has accounted for about two thirds of the overall transactions.


Risk-averse sentiment at its best

Apart from policy loosening, nothing has changed much since early 2015, but the sentiment towards risk assets has shifted dramatically. Back in early 2015, majority of affluent Chinese will be allocating certain amount of their capital to the stock market or mutual funds, thanks to the “reform-driven bull market”. Now, nobody is talking about that anymore. The only certainty that they could think of in terms of asset allocation was in hard assets, as they have consistently outperformed most classes of asset in the past 5 years, especially against the stock market.

(Property Price Index of Beijing, Shanghai and Shenzhen, 2011=100. During the same time period, Shanghai Stock Composite Index has yielded zero return over the same period)


People were pessimistic about the future for a reason – the catastrophic stock market performance last year basically destroyed the confidence of mass affluent class. Their foreign exchange demand cannot be satisfied by the 50,000 USD quota; Yet first-tier cities’ properties’ inventories were shrinking on a rapid basis – Shanghai, in particular, had only 22 weeks of inventories available relative to average weekly sales.  The inventory declined by more than 33% in 2015, contributing to the strong bull run since the inception of 2016. On average, first-tier cities such as Beijing, Shanghai, Shenzhen and Guangzhou, have 33 weeks of inventories available, much lower compared to the national level of 150 weeks! The natural advantage of first-tier cities, with regards to education, healthcare and public resources, have prompted people further to engage in this property boom.

Is “destocking” policies only benefiting the 1st-tier cities? 

It seems that at least for now, destocking policies enacted by the central government has only triggered a full-fledged inflation in first-tier cities’ property prices. The underlying policy background, however, is much more sophisticated. Take Shanghai as an example, it has seen lukewarm price growth in the past 3-4 years, with little volatility and volume growth. Yet without a change to the current purchase restriction, property price has continued to shoot up, leaving no opportunities for those ineligible for buying properties in Shanghai. The government expect these affluent buyers to move to second-tier or even third-tier cities, to “destock” the over-abundant supplies in those cities. The difficulty to implement this policy, however, was to “incentivize” their purchases. Second and third tier cities in China have already been scrutinized for lack of quality education spots, less competent doctors, and less efficient bureaucracies. At this critical juncture, some massive public policy moves might be expected- if this cannot be changed, the “destocking” for those cities will be prolonged and even sabotaged.

At least for now, the critical inventory level and public sentiment has been positive towards first-tier cities’ properties. Is this bull run going to last? We are not as “smart” as Andy Xie, former economist of Morgan Stanley, who has predicted a meltdown for Chinese properties 10 years in a row. Making a prediction for a market is already difficult, let alone this unique market, which is by and large controlled by government policies. Excessive leverage could be a significant risk, yet consumer leverage level remains “low”. We will see how it goes.


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