Evaluating the Risk of Chinese Housing Markets: What We Know and What We Need to Know

Competing claims about conditions in Chinese housing markets are challenging to evaluate because of data limitations. We bring new data to bear on this issue and examine a wide array of property market risk metrics and fundamentals. On average across 35 large cities, real land and house prices have grown at double-digit rates on a compound annual basis over the past decade. However, there is substantial heterogeneity across markets, with Beijing’s land prices appreciating at a real 27.5% rate and its house prices growing by 20% per annum. Interestingly, there is no evidence that supply growth has outpaced demand growth over the past decade in the nation’s capital. This is in stark contrast to conditions in a dozen large, primarily interior markets in which substantial excess supply appears to exist. All Chinese markets, including Beijing, are risky in the sense that appear to be ‘priced to perfection’. Even a modest downward shift in expectations of future price growth could generate a sharp decline in asset values. However, the biggest downside risks are in those places with burgeoning supply-demand imbalances, as any negative economic shock would hit an oversupplied market. Fundamentals do matter, as statistical analysis finds that a one standard deviation higher normalized inventory is associated with a 0.45 standard deviation lower rate of real house price growth the following year.