Key points

On May 17th, under the new policy of the real estate market, the market re-evaluates the future trend of real estate. Can first-tier cities usher in a trend change, and continue to drive the recovery of low-energy city activity? This is the most concerned topic in the current capital market, and it is also a controversial issue.

I. There are divergent views on the first-line real estate policy in the market.

As of the end of May 2024, the number of new homes available for sale in first-tier cities were: Guangzhou (105,000 sets), Beijing (87,000 sets), Shanghai (69,000 sets), and Shenzhen (52,000 sets).

After the further relaxation of Shanghai's purchase restriction policy, the bond market performance is flat because the bond market believes in real data. Pure policy speculation is unlikely to stimulate interest rate adjustments in the bond market.

After experiencing fluctuations, the real estate sector in the equity market has returned to calm, indicating that the equity market is still waiting to see the effect of the first-line real estate policy.

At present, the inventory of first-tier real estate exceeds most periods in history, which is not only the reality faced by first-line real estate, but also the reason why demand for first-line real estate has been relaxed recently.

II. The key to the market's divergent views is how to judge the effective demand of first-line real estate.

The high inventory of first-line real estate has confused the market. After all, first-tier cities enjoy the influx of young population, and it seems that first-line real estate should be in short supply.

By breaking down the total amount of housing and the number of population, we accurately captures that first-tier cities still have absolute (also potential) demand.

We use the housing-to-household ratio index to measure the absolute demand for real estate in different regions.

The housing-to-household ratio in first-tier cities is less than 1, lower than the national average (1.03), and the housing-to-household ratio in third- and fourth-tier cities is close to 2. Among them, the housing-to-household ratio in first-tier cities are: Guangzhou (0.74), Shanghai (0.67), Beijing (0.63), and Shenzhen (0.49).

If household corresponds to potential demand, the total amount of housing supply means the stock supply of housing. The housing-to-household ratio in first-tier cities is less than 1, which clearly indicates that first-tier cities do not lack demand. Strictly speaking, first-tier cities do not have an oversupply of housing.

Since the supply of existing housing in first-tier cities is not excessive, why does the sales of first-tier real estate still cannot increase significantly and inventory continues to rise after the gradual relaxation of purchase restriction policies? The key to the problem may lie in the fact that current first-tier cities lack effective demand, not absolute demand.

The difference between potential demand and effective demand is expressed accurately, the former emphasizing "people" and the latter emphasizing "money". Only the potential demand with real purchasing power is effective demand.

We can use multiple indicators to reflect the root cause of the high inventory behind first-tier real estate, which is the insufficient effective demand. That is, the purchasing power of residents' housing has been declining.

3. The underlying driver of effective demand for first-tier real estate from a macro perspective.

First-tier real estate does not lack absolute demand because low-level city populations continue to flow into them.

Without exception, the permanent population of first-tier cities is larger than the household registration population. Population inflows mean that potential demand expands. The proportion of permanent residents to registered residents in Shanghai, Beijing, and Guangdong is all above 19%, and Shanghai and Beijing even reach 67% and 55%, respectively.

Even during the epidemic, the population has returned to first-tier cities, and the population will turn back to first-tier cities in 2023 as soon as the epidemic disappears.

To observe the effective demand of first-tier real estate, we need to pay attention to an important intergenerational wealth transfer clue across cities.

International experience shows that the house price-to-income ratio in core cities (such as New York, Tokyo, and London) is 15 or less, while the house price-to-income ratio in first-tier cities in China is generally above 30, which is obviously too high.

This data prompts us to think that the house price-to-income ratio can indeed measure the pressure of residents' home purchase, and it also shows an important clue that there are low-level young people entering first-tier cities, and the way of purchasing real estate is more diverse, such as saving after working for a period of time, and then buying a house; or perhaps there is support from family assets.

To evaluate the effective demand of first-tier real estate, we need to fully evaluate the potential income expectations of residents and the current total family asset situation.

4. The future of first-tier real estate: internal differentiation under the new model of real estate development.

Based on the fact that the real estate pressure of current first-tier cities mainly comes from the insufficient effective demand, the focus of future policies may be on further activating purchasing power.

From the perspective of optimizing the cost of buying a house, the policy focus of future demand in first-tier cities may be on two aspects:

First, further lowering the loan interest rate for homes, lowering the down payment ratio, and meeting the purchasing needs of the group that needs affordable housing.

Second, increase the expenditure on demand for improvement of housing, such as the replacement of old houses with new ones and the replacement of small houses with big ones.

In the long run, under the new model of real estate development, the pricing of different quality housing in first-tier real estate may usher in a large differentiation.

On the one hand, indemnificatory apartments are closed and managed, and the track of housing market protection is pushed forward, and most commodity housing resumes its consumption attribute.

On the other hand, as the housing market track is gradually improved, a small number of high-quality housing properties have strengthened their financial attributes, truly pricing their "scarcity".

Main text

Since the announcement of the new policy on May 17th, first-tier cities including Shanghai, Guangzhou, and Shenzhen have successively followed up. On May 27th, the real estate collection policy ignited the market's expectations for a new round of real estate policies.

First of all, it is necessary to pay attention to the fact that the orientation of this real estate policy is different from the past. Firstly, the policy on the demand side of real estate (especially the policy of loosening demand for high-level cities) has the greatest strength in nearly 10 years. Secondly, the real estate policy began to focus on supply, with the typical operation being to lead the real estate acquisition and storage at the central level.

Under the heavy new policy, the market is re-evaluating the future trend of the real estate. As an important indicator of the real estate market, can first-tier cities usher in a trend change in the real estate market? This is the most concerned and controversial topic in the current capital market.

Starting from the objective background of the current real estate policy, we analyze the real reasons and underlying economic logic behind the high inventory of first-tier real estate, deconstruct the focal points and effective space of the real estate policy, and explore the deducing rules of the future trends of first-tier real estate under the new development mode of real estate.

1. There are different views on the policy of first-tier real estate market.

(1) The background of the relaxed policies in first-tier real estate is due to the high inventory of new housing.

First-tier cities have high housing inventory from the inventory dimension. Most of the new housing inventories in first-tier cities are close to or even exceed the historical high points.

We mainly use the number of salable houses to evaluate the inventory pressure of new housing in first-tier cities.

The number of salable houses reflects presale houses that are already approved (have obtained presale permits) but have not been sold yet, and includes stock inventory of existing houses. The sales model of China's real estate, which combines presale and existing houses, determines the number of salable houses. This indicator can accurately reflect the current real estate inventory.

As of the end of May 2024, the number of salable new houses in first-tier cities can be sorted by absolute size, namely: Guangzhou (105,000 sets), Beijing (87,000 sets), Shanghai (69,000 sets) and Shenzhen (52,000 sets)

Since 2021, except for Beijing, the inventory of unsold houses in Guangzhou, Shanghai, and Shenzhen has significantly increased. Among them, the existing house inventory in Guangzhou and Shenzhen has even exceeded the historical high points, which indicates the pressure of inventory in real estate.

(2) The slow inventory digestion behind high inventory is due to weak demand.

Referring to the five categories of targets for residential land regulation of the Ministry of Natural Resources, first-tier cities are facing pressures of inventory digestion.

In 2023, the inventory turnover ratio in Shenzhen and Beijing were both greater than 18 months, which is in the historical percentile of 121%, which means high inventory.

The inventory turnover ratio in Guangzhou is between 12-18 months, which is in the historical percentile of 80%-90%, which means moderate inventory.

The inventory turnover ratio in Shanghai is less than 12 months, which is in the historical percentile of 74%, indicating that the inventory pressure is still relatively small.

We observed that the inventory turnover ratio in first-tier cities is generally weak.

Although there was an increase in the supply of new properties in Shenzhen and Shanghai in 2023, the inventory turnover pressure in Shanghai was significantly less than that in Shenzhen, which was closely related to the difference in the sales of new properties in the two cities.

In 2023, the sales of commodity houses in Shanghai increased by 2.3% YoY, which was the highest among the four first-tier cities in terms of sales growth. From the perspective of inventory turnover cycle and historical percentile, the inventory digestion pressure in Shanghai is the smallest among first-tier cities.

In 2023, the YoY growth rate of commodity houses sales in Shenzhen fell by 13.42%, and sales fell by more than 10% year-on-year, which is far worse than the other three first-tier cities. At the same time, the inventory turnover pressure is also the most severe.

Once we control the sales volume of new properties in Shenzhen to be roughly at the same level in 2023 as in 2022, the adjusted inventory turnover cycle can be controlled within a relatively reasonable range. This indicates that the low inventory turnover ratio in first-tier cities is due to weak demand and slow sales pace.

(III) After the implementation of purchase restrictions, different markets have had different reactions.

After the further relaxation of Shanghai's purchase restrictions, the market's reaction to the policy is mixed.

The bond market's interest rate performance is relatively stable, indicating a bearish view on the effect of first-tier real estate policies. More precisely, the bond market is more confident in realizing data. It is difficult to stimulate bond market interest rate adjustments by pure policy games.

After experiencing fluctuations in the equity market real estate sector last week, it has returned to calm. The effect of first-tier real estate policies on the equity market is still being discussed.

The key to the market's divergent views is how to determine the effective demand for first-tier real estate.

The high inventory of first-tier real estate has left the market confused. After all, first-tier cities enjoy advantages in population inflows, and the supply and demand structure of first-tier real estate should be significantly better than that of third- and fourth-tier cities.

How to understand the intuition that the supply of first-tier real estate residences is insufficient and the current inventory is relatively high? We believe that it is necessary to clearly distinguish between two concepts, absolute demand and effective demand, which are significantly different.

(I) A ratio of less than 1 for households to units does not mean that there is an absolute demand shortage for first-tier real estate.

The ratio of households to units in first-tier cities is less than 1, which intuitively shows that first-tier cities do not lack absolute demand for housing.

We use the ratio of households to units (total number of urban residential units divided by the total number of urban resident households) to measure the absolute demand for real estate in different regions. The ratio of households to units represents the total number of residential units divided by the total number of resident households. We use a city's permanent resident population divided by the average number of households per family to obtain the total number of resident households.

The ratio of households to units in first-tier cities is less than 1, which is lower than the national average (1.03) and significantly lower than that of third- and fourth-tier cities (close to 2). A household-to-unit ratio of less than 1 in first-tier cities indicates that the potential housing demand of permanent residents in first-tier cities is greater than the supply of existing homes. In terms of absolute volume, first-tier real estate should be a pattern of supply exceeding demand.

The ranking of household-to-unit ratios in first-tier cities from large to small is: Guangzhou (0.74), Shanghai (0.67), Beijing (0.63), Shenzhen (0.49).

The household-to-unit ratio may be confusing. Since the total number of resident households is greater than the total number of housing units in first-tier cities, where do the 'surplus' residents live?

A household-to-unit ratio of less than 1 for urban residents describes the following scenario: Under high housing prices and rents, tenants often choose to share housing to reduce leasing costs, which means that one residential unit may have multiple households.

This also means that young people moving to first-tier cities often choose to rent before settling down. At the same time, we can observe that the rental heat in first-tier cities is significantly higher than the national average.

If we further consider the demand for home purchases by the group of collective households in the permanent resident population, the measurement results of the household-to-unit ratio in first-tier cities need to be further reduced, indicating that the absolute demand space for housing in first-tier cities is more considerable.

(II) The current temporary pressure on first-tier real estate is due to insufficient effective demand.

Since the supply of existing first-tier housing is not excessive, why hasn't the absolute demand for housing triggered a significant increase in sales of first-tier homes after demand policies have continued to loosen? In fact, what we observe is a relatively high inventory-to-sales ratio for first-tier real estate.

The absolute demand (also known as potential demand) for first-tier real estate is greater than the current supply. However, the key issue is that first-tier real estate is currently facing a temporary shortage of effective demand. The difference between latent demand and effective demand lies in the fact that effective demand has purchasing power.

Before demonstrating the insufficient effective demand in first-tier cities, let's look at the market characteristics of real estate transactions in international metropolises and current first-tier cities in China.

Looking first at overseas experience, in mature real estate markets for existing residences, the structure of second-hand home transaction will gradually shift toward the central urban area, which is consistent with the trend of population flow to the central urban areas.

In Europe and America's mature real estate markets, as well as in Japan's real estate market after the bubble burst, second-hand housing transactions account for 80%-90% of the entire housing transactions. In terms of transaction structure, the trend of centralization is significant.

Using Tokyo, Japan as an example, the proportion of second-hand housing transactions has been increasing for both single-family homes and apartments since the real estate bubble burst. In terms of the transaction structure, from 1992 to 2022, the proportion of new apartments and second-hand apartments in the suburban areas has shown varying degrees of decline, with the decline in the proportion of second-hand apartments in suburban areas being more prominent.

Now turning to China's first-tier cities. Despite the fact that the second-hand housing market in our country's first-tier cities has been trading at a higher volume than that of new homes, there are also obvious features indicating a downward shift in the transaction structure and a need for 'peripheral' demand.

Using Shanghai as an example, during the March sunshine, second-hand house transactions once surged. In terms of transaction structure, there was an excessively high volume of transactions for houses priced below 2 million RMB, with sales volumes of between 2 and 3 million RMB being 4,476 units, and there being 11,349 units for prices under 3 million RMB, accounting for 64% of the total number of units. The number of transactions for properties under 2 million RMB was at a new high since last March, while 2-3 million was at a new high since April last year.

In March, the share of second-hand housing transactions in the outer ring of Shanghai reached 54%, which was also a new high in nearly a year. After April, as the heat of the market cooled, the volume of second-hand housing transactions also began to adjust in tandem.

What is different from the laws of population movement and foreign experience is that the characteristics of current second-hand housing transactions tend toward 'peripheralization'. We can sharply observe that during the period of high trading volumes for second-hand homes in China's first-tier cities, the abnormal features of low-end and 'peripheral' demand are very obvious.

This kind of transaction structure, which is different from the norm, precisely reflects the true bottom line of current demand for first-tier real estate: the absolute purchase demand of just-needed homebuyers (i.e. potential demand scale) still exists, but the purchasing power of first-tier residents has declined (i.e. effective demand is weak). Only potential demand with purchasing power can truly influence the market and be effective demand. Effective demand can be effectively released through policy revitalization.

3. A macro perspective on the underlying driving forces of first-tier real estate effective demand

(I) Absolute demand for first-tier real estate comes from low-level city populations.

The underlying driver behind the absolute demand for real estate in first-tier cities (the ratio of households to homes is less than 1) has always been the continuous influx of low-level urban populations to first-tier cities.

One of the features of population flow is that the resident population of these four cities is greater than the household registration population.

Population flow is inevitably related to the purchase or rental of housing and is an important direction for the continuous release of real estate absolute demand. The proportion of non-household registration populations to household registration populations in Shanghai, Beijing, and Guangdong is all above 19%, with both Shanghai and Beijing reaching 67% and 55%, respectively.

Another feature of population flow is that, after the subsiding of the effects of the epidemic, the absorption power of first-tier cities has rebounded.

In 2023, data shows that the characteristic of 'people going to more prosperous areas' has clearly returned in the city-level classification of 100 key cities throughout the country.

In 2023, the flow of people in first-tier cities has changed, from the outflow of 163,100 people in 2022 to the inflow of 364,500 people. In comparison, third and fourth-tier cities have weaker competitive advantages and are seeing a trend of outflows of population.

(II) The high price-to-income ratio in real estate is in sync with the clues of population flow and asset transfer.

Behind the clearly high price-to-income ratio in first-tier cities' real estate is also an important clue related to population flow and asset transfer.

First, before we comprehend the logic of population flow and real estate purchasing in first-tier cities, let's take a look at a set of data for the price-to-income ratio of core cities in different countries.

The price-to-income ratio describes the total value of a region's housing divided by the household's disposable income. The price-to-income ratio is a clear description of the number of years of disposable income a household needs to spend to purchase a residence.

Compared with other key cities in other countries, the ratio of housing price to income in China's first-tier cities is relatively high. The ratio of housing price to income in China's first-tier cities is generally above 20. By 2024, the ratio of housing price to income in Beijing, Shanghai, Guangzhou and Shenzhen will be 32, 38, 32 and 30 respectively. The ratio of housing price to income in other major core cities in Asia is roughly in the range of 15-25, while that of key cities in Europe and America is below 15.

Assuming that the high ratio of house price to income is an indicator of high housing pressure, we can draw an obvious conclusion that residents in China's first-tier cities are facing high pressure to buy houses. However, there is another more important question worth pondering, which is how the residents in China's first-tier cities can afford such a high housing price to income ratio.

One of the important reasons why the housing price to income ratio in China's first-tier cities is high is that in the past, purchasing first-tier real estate was not completely reliant on income accumulation, but there were also clues of intergenerational "house-to-house" swaps.

According to a survey by Ke Research Institute, the "sell old and buy new" behavior in first and second-tier cities contributes more to the local new housing market, with an average contribution of 53% in first-tier cities and over 55% in Beijing and Shanghai.

The ratio of housing price to income in key cities in other overseas countries is roughly 1.5-2 times the national average, while in China's first-tier cities, it is roughly 3 times the national average. The disparity in the ratio of housing price to income at different levels measures the profound impact of population trend transfer on family asset allocation.

4 Policies that the market expects to leverage effective demand in first-tier cities.

(1) The policy focus of first-tier real estate may be on stimulating purchasing power.

Against the background of adjusting the supply-demand relationship of real estate, there is still structural demand behind the balance of supply and demand for general housing in the future. This means that the future optimization policy for real estate may be dual-pronged.

For areas with population outflows (low-level cities), more targeted supply-side policies should be adopted to accelerate the disposal of high inventory.

In third and fourth-tier cities, where there is a large population, especially in most prefecture-level cities in the Midwest region, the supply of existing housing is generally oversupplied (the ratio of households to housing units is over 1). Therefore, the supply-side policies, such as real estate acquisition and storage, are more practical and effective in resolving high inventory pressure.

For areas with population inflows (high-level cities), there is still room for the development of real estate supply and demand, and demand-side policies need to continue to be relaxed.

The supply of first-tier real estate has not yet reached the point of oversupply, and there is still room for the development of supply and demand. Therefore, it is necessary to relax demand-side policies. This has already been responded to at the policy level.

Based on the current situation that the pressure on China's first-tier cities' real estate mainly comes from the lack of effective demand, in the future, the focus of policy may be on further activating purchasing power.

From the perspective of optimizing the cost of buying a house, the future policy focus for the demand in China's first-tier cities may fall into two areas:

First, further reducing the interest rate on housing loans and lowering the down payment ratio to meet the needs of the "just need" housing group.

Second, increasing expenditure on improvement-type housing demand, such as "old-for-new" and "small-for-large".

(2) The future market may price the differentiation of first-tier real estate internally.

The historic changes in the supply-demand relationship of the real estate market also mean that the necessity and urgency of building a new model for real estate development have further increased.

Building a new model for real estate development is essentially to adapt to China's real estate transformation from an investment product era to a consumer product era, and to truly implement the housing supply dual-track system of "market + protection".

Under the dual-track system of housing supply, the pricing of different quality residential properties in China's first-tier cities may see large differentiation in the future.

On one hand, the closed management and accelerated construction of indemnificatory apartments, the advancement of the housing market guarantee track, and most commodity residences have regained their consumer properties.

After more than 20 years since the housing reform, the supply of commodity residences cannot keep up with demand, resulting in a scarcity that has led to financial properties in the majority of commodity properties, especially in high-level cities where the supply is even tighter, in China.

Under the new development model of real estate, if the construction of the housing security track continues to advance, the financial properties brought about by scarcity in the majority of residential properties in first-tier cities, especially in high-level cities, may be accelerated in retreat, and commodity residences will regain their consumer properties.

On the other hand, the housing market track is gradually improving, and high-quality residences are further priced with "scarcity".

Along with the gradual withdrawal of historical policies such as housing price controls, purchase restrictions, and loan restrictions, the housing market track is gradually improving. Only commodity residences in first-tier cities that truly reflect land scarcity will retain their financial and investment properties.

At that time, the pattern of China's real estate market will be such that the vast majority of residences (those needed by ordinary people) only have ordinary commodity properties, and only a few commodity residences have certain financial properties.

Edited by Jeffrey