China's real estate sector is very important to both the national economy and local public finances. As reported in a recent report by Intesa Sanpaolo Study Centre, local government revenues from the transfer of land ownership rights ranged from a high of 39% of the total in 2010 to a low of 22% in 2015. Added to these are the various types of land-related taxes, such as the urban land use tax, the occupation of cultivated land, maintenance taxes and the land appreciation tax in case of sale, which they make up between 5 and 6% of local government revenues. At the same time, investment in the real estate sector has played an increasingly important role for the economy, rising from 5% of GDP in 2000 to 11,7% in 2010 and 14% in 2015 (10,6% in real estate residential) e make up 17% of total fixed investment. The sector is also very important due to its implications for related industries and the labor market: the sector in 2014 employed 16% of non-private urban workers.
The performance of the Chinese real estate market was very positive in 2016: the increase in property prices, confined to first-tier cities in 2015, gradually spread to second-tier and, to a lesser extent, third-tier cities. At the same time sales of residential properties accelerated, the sector business confidence index rose and investments in residential construction recorded a modest recovery (+4,9% in the first ten months of 2016) after the historic drop of 0,2% in 2015. The rise in prices, which has exceeded 40% in the last 12 months in first tier cities but also in some second tier cities, was supported by the progressive relaxation of anti-speculative measures starting from spring 2015 and by the easing of monetary policy thanks to which the average rate on mortgages has fallen by around 250bp from the peak in mid-2014. Support for the market, more than in the past, came not only from household demand but also from the more speculative demand of real estate entrepreneurs. Indeed, their participation in auctions for the purchase of new land has become increasingly aggressive, so much so that in some cities the clearing price of land at auction has risen above the price of the properties on the surrounding land.
Investments in the construction sector, on the other hand, recorded a drop of 5% in the first ten months of 2016 after a 10,2% increase over the previous year, driven by the contraction of private investments (-12,5%).
However, in the long term, the real estate market will remain supported by the increase in incomes and the urbanization process. Indeed, the XIII Five-Year Plan has the urbanization target of 60% of the population by 2020 from 55,9% in 2015 with forecasts of reaching around 70% by 2030. At the current forecasts of the US Census Bureau on China's population dynamics this would entail an increase in the urban population of approx. 70 million in 2020 compared to that of 2015 (equal to 767 million) and 215 million in 2030. However, some critical issues of the real estate market remain unchanged, which will once again have a negative impact on the short-medium term prospects of the sector: unsold stock remains high especially in third-tier cities and accessibility, despite the improvement, still remains very low on average for rural households and for the weakest income brackets in urban areas. Participation in the market in the last year also seems to be partially guided by speculative intentions which have favored the creation of a new bubble, especially in first-tier cities.
Analysts believe that the Authorities are moving very cautiously and above all at the local level, on the one hand trying to limit speculation in first and second tier cities and on the other trying to favor the reduction of unsold stocks in third tier cities band. At the national level, the measures were aimed at slowing down the use of credit by entrepreneurs. The lack, so far, of adjustments to deposit rates or taxes at the national level signals that probably the authorities are trying to gradually deflate the market to avoid a too rapid slowdown of the real estate sector given its fundamental contribution to the growth of the economy and local public finances. Furthermore, it is believed that the recently reintroduced restrictive measures will in any case contribute to curbing the advance in prices in 3/6 months. The slowdown in prospects and the probable difficulties of smaller real estate companies will limit the recent recovery of investments in the real estate sector and lead to their downsizing during 2017. The scenario of a gradual slowdown of the Chinese economy in 2017 and 2018 is therefore kept unchanged.
