Have China's Property Prices Reached a Turning Point?
China's commercial housing market has expanded dramatically over the last two decades，propelled by migration to the cities and rapid urbanization. Property development has become an important driver of economic growth. But China has also experienced a persistent case of real estate fever. In the past three years，the swings in China¡¯s property market have been particularly pronounced. Efforts to hold back prices have been in place for some time. Have property prices reached a turning point? What are the financial risks in the property market? How can we implement market controls that keep prices from climbing out of reach?
Zhong Wei，deputy editor-in-chief of China Forex magazine，speaks to Zhang Ming，chief economist of Ping An Securities，and Dong Fan，a professor at the School of Management of Beijing Normal University.
Zhong Wei: Welcome to this round table discussion. China's real estate sector has attracted huge amounts of investment funds and prices have soared over the last two decades. Is it true that housing prices in China’s first-tier cities are higher than those of big Western cities? Could you compare prices in the central areas of first-tier cities，such as in Beijing，Shanghai，Guangzhou and Shenzhen，and those of the world metropolises such as New York and London? How do you view the markets in China's biggest cities?
Zhang Ming: There is no point in making absolute comparisons between housing prices of countries with different income levels. I think it is more helpful if we look at commonly used indexes in order to compare prices. If we look at the housing price-to-income ratio (HPIR)，Shenzhen's HPIR was more than 45 as of the end of 2016，meaning that 45 years of income would be needed to purchase a home. In Beijing and Shanghai the ratio was around 35，while in Guangzhou it was more than 35. Using this same measurement，Shenzhen's housing prices are the highest of the world's major cities. Those in Beijing and Shanghai are equal to the level in Hong Kong and Guangzhou is on a par with London and Singapore. From the perspective of the housing price-to-rental ratio (HPRR)，Shenzhen¡¯s HPRR is more than 70 times the annual rental income while in Beijing，Shanghai and Guangzhou it is around 50 times. Using this measure，Shenzhen's housing prices are still the highest among the world's largest cities，while those of Beijing，Shanghai and Guangzhou are equal to those of Tokyo，Hong Kong and London. To sum up，the housing prices of China's first-tier cities are no less than those of big Western cities.
Dong Fan: First of all，I do not see the prices of core areas in Beijing，Shanghai，Guangzhou，Shenzhen，New York and London as comparable. Such comparisons are inappropriate because of the differences in methods of price calculation，market regulations as well the overall environment. First，ownership of property in China is limited to anywhere from 40 years to 70 years，but there are no such restrictions in major Western markets. Second，the methods of calculating floor area are different. Third，housing quality is also very different. Many domestic dwellings are very different in terms of construction materials，design，property management and surrounding facilities. Other factors such as supply and demand in the desirable cities and regions also play a role.
If we have to make comparisons，consider these factors. In New York，the most expensive area is Manhattan，similar to the Guomao and Financial Street sections of Beijing. In Manhattan，housing prices are higher than prices in those two areas of Beijing. I don't have specific data，but I would estimate Manhattan prices are 20% to 30% higher. It is worth noting that at the top end of the market in Manhattan，the gap in prices is even greater. However，in cities like New York，prices outside of Manhattan fall off quite significantly. They may be similar to prices within Beijing's Fourth Ring Road. That is also the case in London. They are different in terms of the city area，population density，building volume，building density and other indicators. London¡¯s prices for luxury housing are also much more expensive than prices in Beijing，Shanghai，Guangzhou and Shenzhen.
Zhong Wei: The continuing surge in housing prices has cemented a belief that prices have to go up. Some developers claim that there cannot be a decline in prices in their lifetime. Does a small increase or decrease in absolute prices mean the market has reached a turning point? Should this be viewed as an end to price rises across the country or is there are growing gap in prices from city to city?
Zhang Ming: Over the short to medium term，the trend is moving toward greater market divergence. We can look at differences in housing prices from two dimensions. First，younger people with more purchasing power are still more likely to focus on first- and second-tier cities. Second，the bigger cities have better public services，such as quality education，better medical care and higher pensions. This means there is greater demand for housing in first- and second-tier cities. It also means that housing prices in these core cities are likely to remain high，while prices outside of these areas are likely to remain at lower levels. Considering China's per capita income as well as its aging population and the decline in the potential growth rate for the economy，the surge in housing prices has most likely ended. Future housing prices are facing a number of uncertainties. For example，if the Xiong'an New Area can take up some of the non-core functions of the capital and the Beijing-Tianjin-Hebei region is developed in a successful manner，then Beijing's housing prices will not continue to surge.
Dong Fan: In theory，if real estate is an investment instrument，it should experience ups and downs. And from the experience of the global real estate market，without the impact of special external factors，prices in a big country should，in principle，be rising. One thing to bear in mind is that the relationship between supply and demand in the housing market is different from other markets.
Supply is much more elastic than demand in the property market. In the real estate market，supply will only grow. Take residential houses，for example. There is growing need for more floor space and better quality space. There is also no substitute for this commodity so the demand can't be transferred elsewhere. Additionally，the house is linked to the land where it is built. Land is the only fixed asset that doesn't depreciate. In general，it should continue to appreciate，with its annual rate of increase exceeding the depreciation in the value of the building. This will mean an overall increase in housing prices. Moreover，the continuing expansion of the money supply eventually inflates land and housing prices. These reasons will ensure that prices continue to rise over the longer term. In particular，housing prices in a big country will become more regular and declines will occur only occasionally as a result of special，unexpected factors such as war，other disasters or economic crisis.
On the whole，the surge in China's housing prices is not over，even though prices in some small towns do not have much more room to rise. From a national point of view，housing prices are still increasing due to large transaction volumes with high property prices in the first- and second-tier cities. Especially in Beijing，Shanghai and Shenzhen，house prices are far from reaching the top. It is expected that those housing prices will one day surpass those of New York，London and Tokyo. Housing prices in some cities are relatively stable while there are declines in prices in some cities due to huge supply，population outflow or other factors. On the other hand，prices in other cities such as Beijing，Shanghai and Shenzhen，will see more obvious increases.
In the next 10 to 20 years，if there are not too many changes in China's social development，it is expected that housing prices in the first- and second-tier cities will still rise，and those of many small towns will hold steady or decline. As to the national pattern，there will be an ever widening gap between prices in the eastern，central and western areas. The gap between big metropolitan areas and smaller cities can be as much as a factor of one hundred.
Zhong Wei: Many people like to use Japan's bubble economy and the US subprime mortgage crisis to describe the financial risks in China's real estate sector. Japan's economic downturn and the bursting of the real estate bubble is an old story. Moreover，US housing prices are now at levels above those seen in the years bef