The deceleration in China's economy last year was mainly because of a slowdown in property construction that was triggered by a tightening of policy controls on the sector. Developers deferred new construction projects and slowed or stalled many that were already underway. China's property sector is big enough to have repercussions around the world as orders for iron ore, copper and construction equipment dried up. But it was China's economy that bore the brunt of the impact. Last year's GDP growth was the weakest in more than a decade, according to official figures, and roughly two-thirds of the slowdown from the year before was directly due to the weakness in property.
So has the time come for the government to start thinking of relaxing its property market controls? And if now is not the moment for them to be relaxed, how long should we expect the controls to remain in place?
Relaxation of the controls, the most important of which are limits on purchases and on lending to developers and homebuyers, would be widely welcomed. Developers would benefit most but, as they restart projects in anticipation of a pick-up in sales, the gains would spread, including to the rest of the world. China's local governments would also be big winners. For many of them, the sale of land for housing development is a key source of revenue.
The case that the controls have served their purpose is straightforward. Public discontent with the level of property prices has abated significantly since the first round of controls was introduced nearly three years ago. Prices might only have levelled off rather than fallen in most places but, with incomes still rising fast, that has been enough to make the average home much more affordable.
The demand for new property is set to soar. China's urban population is likely to increase by nearly 200 million this decade, according to the United Nations. There is also substantial unmet demand from earlier waves of migrants, many of them still sleeping in dormitories and cramped workplace accommodations. Then there are the ranks of aging residential buildings that will soon need to be replaced.
All told, China's towns and cities are likely to need around 10 million new residential properties each year over the coming decade to meet this structural increase in demand. That is the equivalent of building the entire housing stock of the United Kingdom, Germany and France combined, or two-thirds of the housing stock of the US in just 10 years.
Given this, the answer to the question above might seem straightforward: There is no time to waste, so relax the controls. But that would be wrong.
In fact, despite the policy-induced slowdown in activity, the Chinese property market remains on a wildly unsustainable path. Developers actually completed some 11 million properties last year. In other words, even in the sector's most difficult year on record, developers still managed to build more than enough properties to meet the year's increase in underlying demand. More alarming is that the number of completions rose for a sixth year in a row.
If completions continue rising at the recent rate, in five years the building sites of China will be turning out 19 million new properties each year. Barring some unforeseen surge in the pace of urbanization, that would leave a colossal glut of housing that could only be sold if prices collapsed.
You might wonder whether that would actually happen. Wouldn't the property industry, seeing that supply was on course to outstrip demand, shift direction of its own accord? Perhaps it would. But there are many reasons not to be sure. Plenty of industries in China have gone through waves of boom and bust in recent years.
Those that have, such as automakers and steel smelters, share many characteristics with the real estate sector. They each had countless small players in the boom years, all trying to raise their market share. There were long lags between the launch of investment projects and their completion so that today's market supply conditions proved an unreliable guide to the future.
The difference is that, because of its size, a collapse in the property sector would have wrenching implications for the whole of China's economy and beyond.
The upshot is that the correction needed to return China's property sector to a sustainable path has barely started. Not only is now not the time for policymakers to be thinking of loosening the property market controls, but that moment is still probably years away.
The author is chief Asia economist at Capital Economics, a London-based independent macroeconomic research consultancy.
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