China’s housing market: the world is watching

Madhur Jha Global Economist & Head, Thematic Research

25 Nov 2015

Housing in China is set to pick up again after 2017, but for now the sector is casting a long shadow on the global economy

China’s volatile housing sector may be the single most important sector in the world economy at present. With its extensive impact on other industries, demand for housing drives 20-25 per cent of the world’s second-largest economy.

A few years ago the market was buoyant, with housing and sectors dependent on it contributing about 3 percentage points of GDP growth in 2010.

Lately, however, the sector has been going through a major downturn. Home building in China has slumped in the face of a glut of unsold properties and falling prices, pulling down the country’s GDP growth rate and impacting commodities markets globally.

The slowdown in China’s housing investment is hitting markets beyond the Asia region

China is the world’s largest consumer of steel and cement, and dominates demand for other commodities such as aluminium and nickel. All of these depend heavily on a blossoming housing market. So do domestic consumer durables, such as refrigerators, washing machines and the like, sales of which have stalled in recent months.

The slowdown in China’s housing investment is hitting markets beyond the Asia region. Capital goods manufacturers in Germany, along with their counterparts in Japan, are particularly exposed through their close direct and indirect trade links with China. Commodity producers worldwide have seen the effects of China’s slowdown.

In our view, China has not suffered a general house price bubble. However, the ready availability of land has generated a serious over-supply of housing in some cities

The question is – how much longer will the housing downturn last?

Markets will pick up

We believe the market will stabilise soon, though the sector will only start to pick up after 2017. China will have to build at least 150 million additional homes by 2030, in order to satisfy demand fuelled by urbanisation and income growth.

China’s government has taken measures to relax macro-prudential policies, hoping to boost housing demand as quickly as possible and turn the economy around.

Until the market picks up again, the housing downturn will be casting a long shadow

China is not alone. Other major countries in Asia are also going through a period of adjustment.

In Singapore, prices have already started to fall, and, with a housing bubble in Hong Kong, a correction may be coming there soon. The prospect of US Federal Reserve rate rises is looming, and – based on our detailed analysis – we think a price correction of up to 20 per cent from the peak is possible for both markets in the next two to three years.

But, as the second largest economy in the world, all eyes are on China right now. Until the market picks up again, the housing downturn will be casting a long shadow on the domestic and global economy.

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