China’s housing slowdown and the threat to consumer spending

China’s property market is not having a good year. Sales are slowing, prices are cooling and the government is resisting calls to loosen restrictive policies and give economic growth a boost. However, while they have shown admirable restraint, pressure is building on the authorities to give way and relax their stance, if only because consumer sentiment is so tied up in the fortunes of the housing market.

The FTCR China Real Estate Index fell to 71 in October, its lowest level this year other than at the time of the lunar new year holiday. Although this partly reflects seasonality — activity typically weakens after the week-long national day holiday at the start of October — 2019 is shaping up to be the second weakest year for the housing market since our series began at the end of 2012.

Chart showing FTCR China Real Estate Index

Our survey of 300 developer sales offices across China found falling month on month sales across all city tiers surveyed, while prices rose at a slower rate. As the government maintained its tight policy stance, buyers were still having to pay over the odds to secure mortgage loans. The proportion of developers reporting that even first-time buyers were having to pay above the benchmark rate to secure mortgages rose to 61 per cent, versus an average 55 per cent in the previous 12 months.

Chart showing that the number of first-time buyers having to pay above the benchmark rate for mortgages remains high

The outlook for China’s economy depends in large part on the housing market, not only because real estate directly accounts for about a fifth of gross domestic product, but also because consumers are so invested in the market. According to our latest survey, 90 per cent of Chinese households own at least one property and 35 per cent own two or more, while 28 per cent of all owners said one or more of their homes was standing empty.

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The belief that housing is a one-way bet is deeply ingrained in the Chinese consumer mindset. Despite the government’s long-running and high-profile campaign to clamp down on housing market speculation, 61 per cent of respondents to our October survey said they expected prices to keep rising in the coming six months, including 17 per cent who said they expected a rise of more than 10 per cent.

The fact that most consumers think prices will continue going up is an important prop for sentiment, which, in turn, helps support consumption. Since the end of 2015, our headline consumer index — which includes key measures of sentiment towards household income and discretionary spending — has tended to follow our index measuring house price expectations. The government launched its last big stimulus push at the end of 2015, encouraging banks to dole out mortgages to boost the housing market and cushion the impact of a stock market crash and destabilising outflows.

Chart showing how Chinese consumer sentiment tends to follow house price expectations

If rising prices support consumption, so the inverse holds — if consumers no longer see price gains, they will cut back on spending. This is problematic because consumption accounted for just over 60 per cent of economic activity in the most recent quarter.

Even as economic growth has continued to grind lower, the government has repeatedly insisted it will not budge on housing market policy. But calls for loosening have not gone away, and are only likely to intensify as growth continues to slow. 

The FTCR China Real Estate survey is based on interviews with 300 developers in 40 cities. For further details click here. This report contains the headline figures from the latest Real Estate survey; the full results are available from our Database.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.


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