What is driving the strong demand for homes and real estate in China?

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China’s residential real estate has seen strong demand, and according to Deutsche Bank’s Linan Liu, there are three factors driving it.

Data released Thursday by the National Bureau of Statistics showed that new home prices were up 4.9% year over year in May, compared with a 4.8% increase in April.

The average new building prices in 70 cities also increased by 0.6% compared to April, the same growth as in April compared to March.

Real estate investments have been “quite strong,” while investments in manufacturing and infrastructure have lagged behind expectations, said Liu, head of the bank’s Greater China macro-strategy.

In the household sector, “there is still a pretty robust demand for real estate, either for upgrades or for primary residence,” she told CNBC’s Street Signs Asia on Thursday.

Increase in urbanization

One factor driving demand is increasing urbanization, she said, noting that China’s urbanization rate was around 64% at the end of 2020.

Farmers are tilling the soil of a vegetable garden in front of residential buildings on the outskirts of Shanghai, China, on Sunday March 14, 2021.

Qilai Shen | Bloomberg | Getty Images

“We expect the rate to rise to 70% or 75% over the next five years,” she said. “I think the urbanization surge will continue to support demand in the real estate sector.”

As cities become denser and demand exceeds supply, prices could rise.

Three-child policy

Another factor is China’s new three-child policy, Liu said.

In a major policy change, the central government said last month that couples will now be allowed up to three children instead of the previous limit of two.

“This may increase the demand for bigger properties, upgrades, and so on. This will further support demand, especially in large cities – first and second tier cities, ”she said.

A research note from Nomura pointed to a 0.7% increase in home prices in Tier 1 and Tier 2 cities, compared to a 0.4% increase in Tier 3 and Tier 4 cities.

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China is facing challenges from a rapidly aging population, which has economic consequences, including slower productivity growth. The data shows a decline in birth rates as population growth slowed to its lowest level since the 1950s, leading to a change in policy.

However, it is unclear whether the new directive will encourage people to have more children. Following the announcement, more than 30,000 online respondents in a poll conducted by the state-run Xinhua News Agency said they are not considering having more children because of the new policy.

Improvement of the labor market

Finally, an improving labor market could fuel demand for real estate, according to Liu.

China’s overall urban unemployment rate fell to 5% in May – its lowest level since May 2019, Reuters reported.

“With improving labor market conditions and better income growth, I believe that consumers or households are still looking for (an) upgrade or buying primary (dormitories),” Liu said.

The analysts at Nomura assume, however, that Beijing “is strictly enforcing its tightening measures in the financing of the real estate sector”.

“We believe this could put more downward pressure on growth in the second half of the year – particularly in the fourth quarter of 2021,” they wrote.

– CNBC’s Evelyn Cheng contributed to this report.