The Chinese government’s reluctance to stimulate the housing market is rooted in concerns that short-term growth would once again be bought at the expense of tackling deep-rooted economic problems. These concerns are well founded. 

FT Confidential Research consumer surveys show that the big beneficiaries of the huge run-up in house prices from the end of 2015 were urban residents who already owned property. There has been a notable increase in those owning more than one property, particularly in first-tier cities, where 37 per cent of consumers at the end of last year said they were multiple homeowners, versus 29 per cent at the end of 2015. 

Three years of speculative activity have left more apartments across China sitting empty. With rental yields at  unprofitable levels, homeowners would still prefer to keep their apartments unoccupied (and undecorated) rather than rent them out. 33 per cent of respondents who own multiple properties admit that at least one of them is vacant.

Home ownership rates in Chinese cities have not budged — they have been stuck at a relatively high 90 per cent, reflecting the sale of state-owned housing at the end of the 1990s — while homeowners used the availability of cheap credit to expand their portfolios.

However, after more than two years of policy tightening, house prices are coming under pressure. Our monthly measure of prices, based on a survey of 300 real estate developers, suggests they are falling sharply on a sequential basis. Already-fragile  consumer sentiment is at risk of significant further erosion if this great store of household wealth loses value, or just no longer gains it. Hence the pressure on the government to react and loosen policy. 

Our monthly measure of mortgage rates suggests that house prices will respond if the government again makes credit cheap enough. Mortgage rates appear to have peaked and some local governments have already begun loosening restrictions on their housing markets, fuelling hopes that a national wave of easing has begun.  

But the central government remains wary about relaxing its stance too much. It deliberately eased policy in 2015 to shore up an economy reeling from a collapsing stock market and botched currency devaluation. 

Another burst of speculative activity may boost short-term growth (and let cash-strapped developers  off the hook) but, as our data show, it would also further concentrate wealth, doing little to resolve affordability issues while exacerbating China’s debt problems.

Furthermore, an economic pay-off from loosening policy is not guaranteed this time. The past three years have been characterised by a massive increase in household debt  as consumers leveraged up to buy housing. We estimate debt owed by Chinese households last year rose to more than 120 per cent of their disposable income, up from just 89 per cent at the end of 2015. 

Even if the government does give way and loosen restrictions, indebted consumers may not be able to respond as they did in the past and buy even more apartments.

— He Wei and David Wilder, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.