- 2024-11-13
- News
When to Buy into First-Tier City Residential Properties?
If the average residential prices in Beijing, Shanghai, Guangzhou, and Shenzhen decline by 18%, 32%, 39%, and 43% respectively, their prices would reach the "first layer of safety net."
Housing prices in China's first-tier cities are significantly high. Data indicates that in October 2024, the listed average prices for second-hand homes in Beijing, Shanghai, Guangzhou, and Shenzhen are 62,400 yuan/square meter, 65,800 yuan/square meter, 38,700 yuan/square meter, and 73,700 yuan/square meter respectively. Even with a 10% discount on the listed price, the prices remain steep. If housing prices drop after purchase, buyers would face substantial financial losses.
In September 2024, numerous new policies were introduced to the real estate market, resulting in a significant increase in residential transactions across many cities. According to Wind data, in the third and fourth weeks of October 2024, the trading area of second-hand homes in Beijing, Shanghai, and Shenzhen increased by 66.8%, 80.6%, and 140.4% respectively compared to the same period in September (data for Guangzhou has yet to be disclosed).
Many friends are concerned about rising housing prices and fear missing out on the opportunity, prompting inquiries on whether they should hurry to buy property. While I cannot precisely determine the timing for home purchases, I can suggest two criteria as a "safety net" for potential buyers. When the first standard is met, purchasing a first-tier residential property is relatively safe; when the second standard is met, buying becomes even more secure.
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First standard: Rent is close to or equal to mortgage payment (assuming a loan-to-value ratio of 100%);
Second standard: Rent meets the yield requirement of real estate investment trusts (REITs).
The following section will delve more deeply into these two standards, but both share a common prerequisite: rents must not see a significant decline over the coming decades. While this prerequisite may seem stringent, it holds true based on data from the United States and Japan.
Rents in first-tier cities are unlikely to decline sharply
In the long term, rents in core cities remain stable or trend upward. Let’s first examine the situation in the United States.
The United States has several Tier A cities (essentially equivalent to first-tier cities), including New York, Los Angeles, Chicago, San Francisco, and Boston. The rent index for these Tier A cities is illustrated in Figure 1.
The subprime mortgage crisis of 2008 had a severe impact on the U.S. economy; however, even during the crisis years of 2008-2011, rents in Tier A cities did not plummet.
Now, let's consider the situation in Japan.
From 1990 to 2020, Japan experienced "three lost decades" with very slow economic growth. As shown in Figure 2, rent in first-tier cities represented by Tokyo did not experience significant declines. The 1998 Asian financial crisis inflicted serious damage on the Japanese economy, yet rents in the Tokyo Ward area remained largely stable.
Therefore, we believe that the residential rents in Beijing, Shanghai, Guangzhou, and Shenzhen are unlikely to decline sharply in the future. There may be slight fluctuations, but overall, they will remain stable or slowly trend upward. It is important to emphasize that this statement has two key points: "first-tier cities" and "residential." In other words, this judgment may not hold for "non-residential" properties like office buildings or shops.
Next, we will discuss where the bottom of housing prices in first-tier cities lies, under the two standards we proposed.
How much do housing prices need to drop under the rent standard?
In the following sections, the term “rent close to or equal to mortgage” will be referred to as "the rent standard."
The reasoning behind this standard is as follows: there exists a substantial population in first-tier cities with urgent housing needs that are met through renting. If rents are comparable to mortgage payments, a large segment of this demand could be released, thereby preventing further price declines.
How much further do housing prices need to drop in Beijing, Shanghai, Guangzhou, and Shenzhen to meet the "rent standard"? Figure 3 shows the rental yield calculated using the average prices and average rents of residential properties in these cities.
As of the third quarter of 2024, the rental yields in Beijing, Shanghai, Guangzhou, and Shenzhen are 2.3%, 1.9%, 1.7%, and 1.6% respectively. Considering that there is still potential for mortgage rates to decline, if we assume that the 30-year loan rate will drop to 2.8% and that the loan-to-value ratio remains at 100%, then to satisfy the "rent standard," the housing prices in Beijing, Shanghai, Guangzhou, and Shenzhen would need to fall by 18%, 32%, 39%, and 43% respectively (it is unlikely that rents in these four first-tier cities will surge significantly in the next few years; should any city experience a substantial rise in rents, readers can apply the aforementioned method for their own calculations).
We refer to the purchase price deemed a "safety net" beneath the "rent standard" as the "first layer of safety net." Naturally, owning a home provides many advantages over renting, so prices in reality may not necessarily meet the "first layer of safety net."
Many believe that the "first layer of safety net" is sufficient for security. Normally, this is true. However, under extreme conditions, there is an even safer standard, namely the "REITs yield standard."
How much do housing prices need to drop under the REITs yield standard? If the housing prices in first-tier cities meet the yield requirements of residential real estate investment trusts (REITs), then these funds can leverage vast financial resources in the market to expand their assets. This "expansion of asset size" means purchasing residential properties.
Such purchases can directly prevent housing prices from declining and at the same time send positive signals, encouraging societal capital to do the same. Of course, the current underlying assets of these funds do not involve individual homeowners, but their yield standards can still serve as an important reference.
Except for Zhongjin Xiamen Anju, the other four funds have underlying assets that are all residential properties in first-tier cities. The average yield of these four funds currently stands at 4%. Considering that the benchmark rates have room for adjustment, if we assume a 10% decrease, and that fund yields also fall by 10%, the yield of first-tier residential properties would need to attain 3.6% (4%*90%=3.6%) for housing prices to reach the "second layer of safety net," which is safer than the first.
To satisfy a 3.6% yield, the average prices in Beijing, Shanghai, Guangzhou, and Shenzhen would need to drop by 36%, 47%, 53%, and 56%, respectively. While these price reductions may appear substantial, they represent theoretical values. In reality, various factors would likely prevent housing prices from falling to such levels as they approach these theoretical figures.
In summary, if the average housing prices in Beijing, Shanghai, Guangzhou, and Shenzhen decline by 18%, 32%, 39%, and 43% from their current levels, they would reach the "first layer of safety net." If they were to fall by 36%, 47%, 53%, and 56%, they would arrive at the more secure "second layer of safety net."
The residential properties in the four major cities possess a certain degree of scarcity, and purchasers are not limited to local residents. The fluctuations in housing prices in these four cities serve as benchmarks, and under the government's policies aimed at promoting a recovery in real estate, it is unlikely that prices will plummet to the first safety net, and even less so to the second safety net. For those with urgent housing needs, if prices approach the first safety net and their financial standing is robust, considering a purchase may be worthwhile. After all, owning a home provides a sense of belonging.
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