Skip to main content



Home-building slump to weigh heavily on China’s GDP: StanChart

BEIJING — The slump in house building in China has driven half of the slowdown in the country’s economic growth since 2010 and is poised to weigh even more heavily next year, according to analysts at Standard Chartered bank.

BEIJING — The slump in house building in China has driven half of the slowdown in the country’s economic growth since 2010 and is poised to weigh even more heavily next year, according to analysts at Standard Chartered bank.

The housing market is in even worse shape in Hong Kong, where residential property prices will fall by 10 to 20 per cent in the next two to three years, the emerging markets-focused bank forecasts, and Singapore, where prices are already falling and are likely to decline by a further 5 to 10 per cent.

“China’s volatile housing sector may be the single most important sector in the world economy at present,” says Mr Enam Ahmed, senior economist, thematic research at StanChart.

“Home building has slumped in the face of a glut of unsold properties and falling prices, pulling down the country’s gross domestic product growth (GDP) rate and impacting commodity markets globally.”

Mr Ahmed adds: “Expected United States rate increases are hanging over housing markets in Singapore and Hong Kong, compounded by fears that Hong Kong housing is in a bubble. Prices have already peaked in Singapore and are likely peaking in Hong Kong now.”

StanChart calculates that housing and sectors linked to housing, such as the residential component of cement, steel, glass and copper demand, contributed 3 percentage points to China’s GDP growth in 2010, but just 1.1 percentage points this year.

With economic growth having slowed from 10.6 per cent to 6.9 per cent over the same period, this suggests that the ills of the housing market were responsible for half of the slowdown in economic growth.

Mr Ahmed believes the residential property sector will weigh more heavily still next year, with its contribution to economic growth falling to between zero and 1 percentage point, although a pick-up in activity elsewhere in the Chinese economy should keep overall GDP growth at around 7 per cent, he forecasts.

StanChart does not believe that mainland China is suffering from a generalised house price bubble, even if prices, relative to wages, have risen to eye-watering levels in major cities such as Shenzhen, Beijing and Shanghai, as Chart 1 shows.

Instead, Mr Ahmed argues that the ready availability of land has generated a bubble in house building, creating serious oversupply, especially in Tier 3 and Tier 4 cities, many of which saw a building boom between 2011 and 2013.

Housing starts have since fallen by 28 per cent, but StanChart estimates that the excess inventory of unsold properties stands at nine million, while a further 40 million to 50 million homes are being held vacant as investments.

Against this backdrop, the bank believes housing starts will fall a little further, before stabilising, as the excess inventory is worked through.

Longer term, however, Mr Ahmed is more upbeat. Given continuing urbanisation, rising incomes and the potential relaxation of the hukou household registration system, he believes demand will rise by 175 million homes by 2030, opening the door to construction of about 150 million new properties.

Other analysts have a guarded view of the Chinese residential property sector, in the short to medium term at least.

Mr John-Paul Smith, partner at investment advisory firm Ecstrat, in his outlook for next year, argues that inventory levels “remain too high through most of the country for a sustainable increase in housing starts and land sales”.

Mr Prakash Sakpal, Asian economist at ING, believes that housing starts will rise in 2016 as more Chinese cities report higher prices (39 out of 70 in September, up from zero a year earlier). Nevertheless, Mr Sakpal, who argues that prospects for a broader turnaround in growth depend on the housing market, fears real estate will remain the “weakest component” of fixed asset investment next year, despite his forecast uptick.

Messrs Chang Liu and Julian Evans-Pritchard, China economists at Capital Economics, point out that average mortgage rates fell by 143 basis points between November last year, when the People’s Bank started easing monetary policy, and the end of June, and are likely to have fallen further after a 25bp rate cut in August.

Sales data from developers suggest price growth has also picked up, they say, but “stable” future demand and the “glut” of unsold properties mean the market will likely remain subdued.

In neighbouring Hong Kong, where house prices have risen 190 per cent since 2008, StanChart says the residential market “meets almost all our criteria for a bubble”, including high valuations, rising indebtedness, a “new element” driving prices (mainland Chinese buyers), “avid” media and public attention and very easy monetary policy.

Yet the bank does not anticipate a fall in property prices anywhere near as severe as the 65 per cent slump witnessed during the Asian financial crises of 1997-98. Instead, Mr Ahmed foresees a “manageable” correction of 10 to 20 per cent over the next two to three years, given “strong” economic fundamentals and an expectation that the US Federal Reserve will raise rates by less than 100 basis points during 2016 and 2017, an important consideration in a territory that is forced to import US monetary policy in order to maintain its currency peg.

In Singapore, house prices have already fallen 8 per cent since 2013 as the central bank has tightened lending policies and immigration has slowed. Compared with Hong Kong, Mr Ahmed is more relaxed about a potential bubble in Singapore, given that valuations are less stretched and that the market is less vulnerable to a Chinese slowdown or faster-than-expected US monetary tightening.

Nevertheless, he sees Singapore property prices falling a further 10 per cent. The International Monetary Fund has estimated that a 10 per cent fall in house prices in Asia has typically reduced GDP growth by 2.5 percentage points. However, StanChart does not believe this will prove the case in Hong Kong or Singapore this time around.

“In our view the effects are likely non-linear so a moderate fall in house prices has proportionally less impact on GDP than a larger fall,” said Mr Ahmed. “This is one reason we believe the moderate declines in prices we expect in Hong Kong and Singapore will not cause a recession.” FINANCIAL TIMES

Read more of the latest in



Stay in the know. Anytime. Anywhere.

Subscribe to get daily news updates, insights and must reads delivered straight to your inbox.

By clicking subscribe, I agree for my personal data to be used to send me TODAY newsletters, promotional offers and for research and analysis.