NOMURA: China’s housing bubble is spreading to its smallest cities

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    bubble flamingGetty Images

    China released updated house price data for May earlier this week, reporting a national increase of 0.7%, unchanged from the April levels.

    While price growth is now starting to accelerate after slowing sharply at the beginning of the year, the strength on this occasion is being led by the nation’s smaller housing markets rather than in previous cycles where the gains happened in China’s largest centres.

    Just have a look at the chart below from Nomura as evidence of the recent divergence in prices:

    China house prices by tier May 2017Nomura

    Those in smaller tier three and four cities are now leading the pack, outpacing that in larger tier one and two cities stemming from tougher buying restrictions implemented by local regulators to quash what was previously rapid growth.

    “Stable headline property price inflation masked the divergence between top- and lower-tier cities,” says Yang Zhao and Wendy Chen, economists at Nomura.

    “Property price growth in May in the four Tier-1 cities declined further to 0.1%, largely dragged by Shenzhen (-0.6%) while prices remained flat in Beijing and Shanghai.

    “Property price inflation in lower-tier cities was higher. May prices rose by 0.6% month-on-month in Tier-2 cities and 0.9% in Tier-3/4 cities.”

    According to the pair, this price divergence is “a sign that the property bubble is spreading to lower-tier cities.”

     

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