Kay Sun, a 32 year-old administrative assistant put down a deposit last month on a 2.85 million yuan ($460,000) one-bedroom apartment in Shanghai.
It was a financial stretch for the single Ms. Sun, who works at an information-technology firm in a position that typically pays about 15,000 yuan a month. She needed money from her parents to fund the down payment.
Her move may seem bold, but she isn’t atypical. Around China, signs are growing that a government campaign to bring housing prices closer in line with incomes is starting to bear fruit.
That is breathing new life into China’s real-estate market and economy. Data slated for release Friday is expected to show growth in gross domestic product accelerating to 7.8% year on year in the fourth quarter, up from 7.4% in the third.
Since 2009, average disposable income in China’s cities has risen around 43%, but house prices only 11% according to official data. An average-priced apartment purchased outright would now cost around 16 years of average income, still high by international comparisons but down from a high of 21 years in 2007. That raises hopes that millions of young professionals will be able to get a hand on the first rung of the housing ladder, buoying demand.
In Shanghai, the campaign—which includes purchase restrictions on multiple homes and higher down-payment requirements—has kept average property prices flat for two years, according to data from property consultancy SouFun. Meanwhile, Ms. Sun said her salary rose by more than 10% on average each year, typical of many white-collar Chinese workers, placing her at a point where a house purchase seemed within reach.
“It’s not cheap, but the location is good,” she says of the apartment in a high-rise building in a residential district north of the Shanghai Bund. “I heard that prices may start rising this year, so I thought, better to buy now, since I can afford it.”
Chinese house buyers pay a much higher multiple of their incomes on purchases than do buyers in the U.S., where prices are typically a midsingle digit multiple of average income. In 2010, as prices approached astronomical heights, the government stepped in to halt escalation, allowing incomes some space to catch up.
Three years after government controls curtailed growth, Chinese developers have turned cautiously optimistic. China Vanke, the mainland’s largest developer by revenue, reported Jan. 7 that sales more than doubled in December from a year earlier, with sales for the year as a whole up 16.2%.
Stocks of major developers have rallied. Shares in Hong Kong-listed China Overseas Land & Investment Ltd. are among the best-performing on the territory’s stock exchange, up more than 90% from the start of 2012, compared with 26% for the overall market.
“Home buyers are returning to the market in droves. One asked me recently, ‘I bought a home on the third floor at a new launch, is that OK’? I said, count yourself lucky you managed to get a unit.” said Yang Jun, a real-estate agent in Shanghai.
Stronger sales are pushing developers to break ground on new projects. New floor area under construction was up 6.3% year on year in November, after spending much of the year in negative territory.
Real estate is the single biggest driver of output in China’s economy. According to the International Monetary Fund, it accounts for about 12% of the total. Factoring in the impact on everything from steel and cement to furniture and home appliances, the sector’s contribution is even higher.
“Steel mills anticipate stronger demand from real estate in the year ahead” said Graeme Train, metals analyst at Macquarie. China’s steel production rose 15% year on year in November after flat-lining in the first half of the year. Rising iron-ore prices have prompted Australia’s Fortescue Metals Group FMG.AU -1.90% to resuscitate its plans for $1.2 billion in stalled investment projects.
Leaders now seem less nervous about a property bubble. Officials from the Ministry of Housing and Urban Rural Development have said the government will support owners looking to upgrade as well as first-time buyers, raising the prospect they will get better access to mortgage loans.
Developers caution that the recovery has come from a low base. “Although transactions in major cities rose significantly in 2012 from 2011, this is based on the low growth rates in 2010 and 2011,” said Tan Huajie, Vanke’s board secretary.
There are plenty of risks for the market. Three years of government controls have left developers with higher debt and unsold inventory. There is enough residential property currently under construction to meet about five years of demand, without new projects being started, up from 2.9 years in 2009.
A return to the boom years for China’s property isn’t in the cards. Keeping apartments affordable for first-time buyers is a priority for the government, including Vice Premier Li Keqiang who has been a prime force behind the push to build millions of subsidized homes for low-income households.
China’s house prices are edging back up now, with SouFun data showing average prices up 0.03% year on year in January, ending eight months of declines.
Analysts caution that a sharp rise in prices would likely trigger a return of strict controls by the government.
“We will be looking to invest in smaller-scale projects this year,” said Freddy Lee, chief executive of major developer Shui On Land 0272.HK +0.80% . Mr. Lee said that the developer suffered from cash flow issues following heavy investment into large-scale, mixed used projects in recent years.