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Print Edition> Business
UPDATED: September 1, 2015 NO. 36 SEPTEMBER 3, 2015
Market Watch NO. 36, 2015


Real Estate Becomes a Less Capable Stimulator

As China's real estate industry is entering a new stage of medium-to-low speed growth, and the industry itself is undergoing readjustment, it becomes less able to push forward economic growth.

Although the real estate market has been recovering since March, with transactions showing more activity and housing prices in major cities rising, major indicators of the industry are falling.

From January to July, areas of land purchased by real estate developers dropped by 32 percent year on year, while the land prices dropped 25.6 percent over the past year. Among the 70 large and medium-sized cities, prices of newly built apartments in 29 cities dropped on a monthly basis, while those in 67 dropped on a yearly basis. Therefore, the real estate market has not yet reached where it was in the same period last year. While apartment transactions are resuming growth this year, more second-hand apartments have been sold than newly built ones, which may slow down the process of reducing the stocks of newly built apartments.

The property industry stimulates the macroeconomy in two ways—growth of the industry itself will contribute to the GDP growth; and it can also facilitate the development of related industries, such as construction, furniture and home appliances. But at present, the real estate industry is less powerful in facilitating the development of real economy.

Land purchase costs account for a large percentage in the total investment in real estate development. According to the National Bureau of Statistics (NBS), in the first half of this year, the country's investment in real estate development grew by 4.6 percent year on year, while the costs in land purchase went up by 15.1 percent.

Although land purchase costs are part of real estate investment, they are not calculated into the GDP. If the percentage of the costs in land purchase rises, real estate investment will not make as many contributions to the GDP as the nominal investment seems to make. Particularly, in big cities where housing prices and real estate investment rise rapidly, the costs in land purchase grow even faster. In the first half of 2015, real estate investment in Beijing grew by 17.6 percent from the past year, but the costs in land purchase soared 72.9 percent. In Shanghai, real estate investment rose by 15.8 percent, while the costs in land purchase went up by 40 percent.

The construction industry becomes less prosperous. In the January-July period, the construction areas by the country's real estate developers rose by 3.4 percent year on year, which was 0.9 percentage points lower than the rate in the January-June period. The construction areas of new housing projects declined 16.8 percent in the first seven months.

Affected by the declining construction areas and new projects, China's construction industry has shown some slackness. In the first quarter, the value of contracts signed in the construction industry grew by 9.3 percent year on year, which was 6.7 percentage points lower than the rate in the same period last year. Slowdown of the construction industry also had an impact on the number of migrant workers. A survey by the NBS also shows that in 2015, the total number of migrant workers will only grow by 0.1 percent, much lower than the average growth of 5 percent in previous years.

Some other related industries have also been affected. In 2015, the output of refrigerators will be the same as that in 2014, which was 0.7 percentage points than the growth in the previous year; the output of color TV sets will grow by 2.7 percent, which was 9.9 percentage points lower than that in the previous year; the output of aluminum products went up by 10.2 percent, which was 9.4 percentage points lower than the rate in 2014. The output of cement dropped by 5.3 percent, while in 2014, cement output grew by 3.6 percent.

It's not accidental that the real estate industry has become a drag on the economy. The explosive growth of the real estate industry in the past few years, especially since 2009, has far exceeded the growth potential of the country's real economy.

Although the industry can facilitate the development of related industries, the excessive growth of the real estate industry will inevitably damage the balance between the industry and others, causing uneven growth of the macro-economy in the short term. In the mid- and long-term, it could even damage the potential of economic growth.

Accelerated urbanization has triggered steady growth of the housing demand, but the housing price has long been unreasonably higher than the level of residents' income and housing rent; therefore such demand is hard to sustain. Since apartments are durables, if the percentage of apartment is excessively high in the wealth of a family, people will have less to spend.

While the country is encouraging entrepreneurship and promoting innovation, housing prices should drop to a reasonable level, so as to lower the costs of starting up businesses or making innovations. A social atmosphere with enthusiasm in real estate investment or speculation can hardly generate the driving force behind economic transformation and restructuring.

This is an edited excerpt of an article written by commentator Xiang Zheng and published in Securities Times


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Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com

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