Property

Will RMB depreciation drag down home prices?



Renminbi (RMB) has been depreciating against USD quite significantly -- a depreciation of around 7.6% has been recorded compared with a year ago. Market also expects that RMB depreciation will continue, which has raised concerns from investors. Some people comment that it will cause home prices to fall since the currency depreciation affects investors’ investment return, which will in turn affect capital flows. Apart from capital flows, housing prices are also affected by many other factors, like sufficient liquidity in the market, population movement, house supply etc.

RMB depreciation will result in capital outflow and may increase pressure on housing prices; on the other hand, given overflow of capitals and insufficient high-quality assets in the mainland market, capitals lacked investment opportunities and therefore flew to property market. This resulted in rising home prices in first and second-tier cities as well as record-high prices in land sale market. Capital outflows do happen in mainland; at the same time, residents, other than investors, have strong demand on houses, coupling with many rural workers migrating to cities, demand always exceeds supply in these areas, and hence, it is unlikely for housing prices to drop significantly.

Then what is the correlation between exchange rate and home prices? From the perspective of commodity prices, if China’s housing prices are too high, investors will purchase houses in other places, meaning that increase in home prices will lead to capital outflow and currency depreciation. The more the currency depreciates, the cheaper the real home price is relative to other countries, and the lower the adjustment pressure on home prices. Therefore, if home prices fall, the pressure on currency depreciation will be lower. Of course, this just explains how currency and home price are affecting each other. Both of them are also influenced by other factors.

From the perspective of real economy, can the government prevent home prices from falling through currency depreciation? The answer is that it is infeasibility to solve the problem by depreciating the currency. Since China is the second largest economy in the world, substantial RMB depreciation will be required if depreciation is used as the way to deter home prices to fall, which will also create a huge impact externally.
In short, RMB depreciation may not create substantial adjustment of home prices. Yet, high housing prices will hinder economic development, thus the government should control home prices through other means, like land policies, tax policies etc. The Chinese economy is transforming to service sectors. High home prices, for example in the financial services centre Shanghai, will hinder young people’s plan to work in large cities, and impede the sector’s development.