The news of a sharp decline in housing prices in Beijing's Huilongguan area was quite unexpected. The significant drop there actually began in the first half of last year, with prices falling 10% before Beijing lifted purchase restrictions outside the Fifth Ring Road in August. The expectation was that this policy change would provide a boost to the market, but instead, it triggered a more pronounced sell-off, leading to an additional 10% decline in just two months. I've previously stated that simply relaxing purchase restrictions is ineffective; the current issue isn't a lack of eligibility to buy, but a lack of funds. To genuinely stimulate the property market, measures like lowering mortgage rates or issuing housing subsidies are needed.
However, my main point today is different. Following this year's substantial drop in Huilongguan, I've learned that the rental yield for relatively new properties there, built in the last decade or so, has approached 3%. This was surprising. Being most familiar with Shanghai's market, I know that no similar property in Shanghai currently offers a 3% rental yield.
My long-term forecast for the property market is that rental yields should settle at around 3% in first-tier cities, 4% in second-tier cities, and 5% in third-tier cities. There are two reasons for the 3% target in top cities. First, in mature markets, rental yields should slightly exceed mortgage rates. Considering that mortgage rates may continue to decline, a 3% yield in first-tier cities seems reasonable. Furthermore, with government bond yields around 2%, it's logical for real estate—a less liquid and depreciating asset—to offer a slightly higher return.
Second, comparing with Japan, Tokyo's rental yield is close to 5%. After accounting for their higher property holding costs, the net figure aligns closely with 4%. Considering that Chinese properties are bundled with urban resources (primarily education), a 3% yield in first-tier cities appears justifiable.
The rationale for adding 1% and 2% for second- and third-tier cities, respectively, is that cities with lower economic tiers generally have weaker future potential and liquidity, necessitating a higher yield as compensation. This pattern holds true in property markets worldwide. In stock market terms, this is akin to the premium awarded to leading companies.
If Beijing's rental yield reaches 3%, other cities should not exceed this benchmark. Of course, Huilongguan is an exception; Beijing's overall rental yield remains around 1.9%, similar to other first-tier cities.
Examining other cities reveals some imbalances. For instance, in Zhejiang—a province known for property speculation—the rental yields in Hangzhou and Ningbo are 1.9% and 2.0%, respectively. This is不合理 for second-tier cities, as they shouldn't match first-tier levels. These cities are likely to experience steeper declines than first-tier cities, especially Ningbo.
In neighboring Jiangsu province, Nanjing and Suzhou show slightly better yields of 2.1% each, but this is still not significantly different from first-tier cities, which is不合理. Some inland second-tier cities fare better, with yields about 0.5% higher than first-tier cities.
A notable outlier is Xiamen, with a rental yield of only 1.5%. The reputation of "Beijing, Shanghai, Shenzhen, Xiamen" holds true. I can only advise residents there to consider selling their properties if possible.
A city worth highlighting is Urumqi, not for exceptional economic growth, but for its lack of property speculation and low prices. Its resilience against price declines stems from affordability and a high rental yield of 3.6%. This indicates virtually no bubble, making it one of the few cities in China where prices haven't fallen (Hong Kong is another famous example, also boasting a rental yield above 3%).
Returning to my yield targets of 3%, 4%, and 5%, I believe few, if any, Chinese cities currently meet them. Does this imply all properties will decline? Not necessarily. While a city's overall average may not reach the target, specific developments within it might, as seen with Huilongguan in Beijing.
Furthermore, these targets are based on comparisons with mature markets—those with stable economic growth and steady rents. If China's rental prices resume growth, achieving yields slightly higher than my suggested levels could become reasonable. For now, I stand by my assessment.
Finally, it's worth noting that most cities mentioned have seen prices drop around 10% in the past year, indicating a phase of rapid decline. This process is trading time for space, gradually squeezing out the property bubble.
The peak of the real estate boom before 2022 saw incredibly lax lending standards, with easy mortgage approvals and inflated income statements. The prevailing sentiment then was that mortgages were the cheapest loans one could get, and borrowing more was advisable as rising prices would cover costs. This mirrored the pre-2008 US subprime mortgage crisis.
Today, the landscape has shifted dramatically. Not only is taking on new mortgages less common, but many are actively prepaying existing ones, leading to application queues for early repayment. This underscores how quickly times change. The world a few years from now is hard to predict, urging extreme caution in making long-term decisions.
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