China's Soft Landing

Global Economics China: Soft landing remains our base case

Latest data confirm our soft landing scenario At 8.1% YoY, GDP growth in China in the first quarter of 2012 was the weakest since the global financial crisis. However, while recent Chinese data have been mixed, overall they confirm our "soft-landing" scenario. Officially reported property sales were down 15% YoY in the first three months of the year, but sales tracked by Soufun across ten Chinese cities have risen sharply since the Chinese New Year (see Figure 1). There are also tentative signs of stabilization on the price front, as the number of cities that saw a decline in house prices has diminished in recent months – according to the National Bureau of Statistics (NBS) – even if the average price decline was again greater in March. The latest PMI data also suggest that the economy is at least stabilizing, if not improving. Incomes have barely risen enough to keep pace with rising house prices, affordability remains poor We examined the Chinese housing market one year ago (see Research Weekly – Global Economics – China housing market: further slowing likely, 01/04/2011). The slowdown that we expected materialized, and this has clearly helped to improve affordability. Property prices tracked by Soufun across five Chinese cities were essentially flat over the past two years, while income has continued to rise strongly. Concerns about overvaluation remain, however, as average nationwide house prices have risen between 70% and 90% since 2007 depending on the data source. This is even stronger than the increases seen in Ireland or the USA between 2002 and 2007. Household incomes have risen strongly as well, but barely enough to keep pace with rising house prices (see Figure 2). Affordability therefore remains poor. According to our calculations, the cost of a house averages around 15 times annual income in 15 large Chinese cities, compared to around 5 years in the USA or the UK.

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