Did Yuan depreciation influence residential price of Chinese first-tier cities?

 Source: AVISTA Research

Recently, the sharp depreciation of Yuan has aroused widespread discussion concerning its repercussion on the residential property price in China. However, after comparing the exchange rate index of CNY against USD (USD CNY Index) with the residential price index of Chinese first-tier cities (Beijing, Shanghai, Guangzhou and Shenzhen) in the past 10 years, AVISTA research maintained that there was no apparent relationship between these two issues. This was primarily attributed to the strict control of the capital account implemented by the authority which resulted in relatively limited foreign investment into the Chinese real estate industry. Additionally, the Chinese residential market was still internal demand-oriented, which could be immune from the fluctuation of external economy and variation of exchange rate to some extent. Therefore, in the short term, this round of Yuan devaluation may possibly increase overseas financing costs of mainland developers, while in the long term, it will not reverse the rising tendency in residential prices of those metropolis.

 

Compared with exchange rate, the interest rate demonstrated more correlation with the residential price according to the Chinese Loan Interest Rate (Over 5 years) Index (CHLR5YA Index) for financial institutions. The logic behind was that the reduction of loan interest rate may decrease mortgage costs of home purchasers and financing costs of developers, thus stimulating housing demands as well as enhancing property prices. Nevertheless, AVISTA research held that the interest rate was only the catalyst of real estate price which fundamentally, was more vulnerable to the psychological expectation of both buyers and sellers. In China, this expectation originated from the recognition of potential risks in a transitional economy, the judgement of coming trends for domestic regulatory policies, the prediction of future supply of lands and buildings as well as the confidence of personal income growth.

 

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