The impact of China’s anticorruption campaign on the real estate market

Published 25th April 07:00 HKT

This year the Chinese property market has regained its ‘Bubble of China‘ title, taking back the belt from last year’s upstart, the bruised and battered Chinese stockmarket.

At the beginning of the year two divergent trends emerged, where tier one cities whipped up a buying frenzy, whilst their provincial neighbours could only look on in envy, and wonder where was their leverage fuelled bubble?

Yet April’s property market data from the National Bureau of Statistics shows house price rises in smaller cities are now finally catching up, easing fears for those worried the property bubble would burst before the Dragon Boat Festival.

Some local media reports indicate that Chinese investors, having been priced out of tier one cities, are chasing the bubble into tier two cities, presumably availing of China’s new high speed rail lines, in order to beat their neighbours to that piece of real estate 10 miles from the city centre (next door to the Wanda all in one shopping mall/office tower/3D cinema/cartoon theme park complex).

As one resident complains “I can’t find a house to buy!”, another is quoted as saying “It’s fine as long as I can buy a house, regardless of which district its in”.

However a research report from Shenzhen’s Essence Securities offers more sobre reasoning for the tier two city price bounce — local officials ensnared in Xi Jinping’s anticorruption campaign.

According to the Chinese broker, looking at the 32 tier two cities (mainly provincial capitals), the 11 cities that lost senior level officials (Party secretary, mayor, etc.) to the antigraft campaign, saw their combined land sales for 2015 plummet year on year by 38%. The remaining tier two cities unaffected by the anticorruption campaign instead experienced a combined land sale increase of 1% year on year.

Thus to April this year, the 11 cities that lost officials experienced annual price increases of 6.3%, versus only 4.5% in the unaffected 21 cities.

In other words, the replacement of senior local officials in the antigraft campaign disrupted local land supply, limiting the supply of new housing, and therefore forced prices up. The broker believes this to be the major factor in controlling local land supply.

Of all the approaches being tried by Beijing to clear down the nation’s chronic levels of housing inventory, this appears by far the most effective. It also has the added bonus of removing any local resistance to its ‘supply-side’ reforms.

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