China: Decline in house prices intensified in August

The weakness in the housing market intensified further in August as more cities reported declining house prices. China does not report a nationwide house price index, but only development in house prices for individual cities. However, we have calculated our own nationwide house price index based on the development in house prices for new homes in the 35 largest cities.

According to our calculations, the increase in prices for new homes in August eased to 0.8% y/y after increasing 3.0% y/y in July. Seasonally adjusted house prices declined 1.1% m/m in August after declining 1.0% m/m in July. August was the third month in a row with a decline in house prices. According to our calculations, house prices have declined 11.3% annualised over the past three months.

The decline in house prices now appears to be more severe than the declines the Chinese housing market experienced in the previous two downturns in 2008/09 and 2011/12. The development in house prices is usually closely connected to the development in sales of new homes but in the past two months the declines in house prices have been more severe than suggested by the development in new home sales alone. This indicates that supply factors have increasingly started to weigh on house prices in July and August. In particular, it appears that credit-constrained developers are increasingly being forced to liquidate inventories of unsold homes.

The intensifying weakness in the housing market is a concern, although a minor correction in house prices is likely to be welcomed by the government. New home sales tend to lead both house construction and house prices, so we would need to see a stabilisation in new home sales before we could call the bottom for the housing market. The development in financial conditions suggests a stabilisation in new homes sales later this year but a substantial recovery in the housing market will probably require an interest rate cut. So far the main policy response has been to ease some of the restrictions on home purchases that have been introduced in recent years at the local level. In addition, the government is channeling funding to construction of public housing.

On a positive note, there are so far no signs of a substantial negative spill-over to private consumption from the weak housing market. Real retail sales were broadly flat in August and consumer confidence has also been resilient. The IMF estimates that the wealth impact on private consumption in China is relatively low due to households’ low debt leverage. Specifically, the IMF estimates that a 10% drop in house prices will cut private consumption by 0.7% (spread over more than one year).