The National Bureau of Statistics (NBS) mentioned in the 3Q2016 GDP press release that the property boom has helped support GDP growth and “contributed to ~8% of the GDP growth in 3Q2017”. The statement has attracted media attention and investor concerns in regards to 1) how the calculation came about, and 2) what this number implies for economic growth going forward. In this note, we share our thoughts on these questions by expanding on some of the key conclusions from our recent thematic research on the potential macro impact of a slower property market.

The “~8%” (contribution to GDP from the property sector) may be intended to represent the share in real GDP growth of the real estate service sector. In the context of quantifying the boost to GDP from the property sector, the “~8%” should have referred to the contribution from the downstream real estate service sector, rather than real estate investment, since 1) GDP by expenditure data in China is only available on annual basis, it is difficult to pinpoint the contribution from property investment to GDP growth in 3Q, and 2) the GDP by industry data released on October 21 (one day after the headline GDP data came out) showed a deceleration of YoY construction industry growth in both real and nominal terms in 3Q (which in effect was not a “boost” to growth). On the other hand, real estate service growth came in at 8.8% YoY in 3Q2017 in real terms, flat from 2Q but showed notable improvement from 3.8% YoY in 2015 and 2% YoY in 2014. More impressively, real estate sector growth picked up to 16.3% YoY in 3Q2016 in nominal terms, from 15% YoY in 2Q2016 and 8.7% YoY in 2015.

However, our calculation indicates that in 3Q2016, the real estate service sector contributed to around 12.3% of the nominal GDP growth, and 3.8% of the real GDP growth. The notably higher contribution to nominal growth was not only driven by the sector's faster growth in nominal terms, but also its considerably larger share in GDP on the nominal basis vs. real basis. The share of real estate service sector in nominal GDP was 6.0% in 2015; while according to our estimate, its share in real terms was notably lower at only 3% last year. Inflation of the real estate service sector has persistently outperformed the rest of the economy (represented by the GDP deflator) in the past 2 decades – out of the 83 quarters since 1Q1996, real estate service deflator recorded positive values for 81 (i.e. price hikes), and outpaced GDP deflator growth for 72 quarter. To a certain extent, these statistics are consistent with what we have observed in the property prices trend so far. As a result, the cumulative inflation incurred by the real estate service industry exceeded the rest of the economy by more than 2X since 1996, and the wedge between its share in nominal vs. real GDP kept growing. Therefore, while the contribution of real estate service was a sizable 96 bp to nominal GDP growth in 3Q2016 (or 12.3% of the 7.8 ppt),  the contribution was much more modest at 25 bp in real terms (or 3.8% of the 6.7 ppt growth of real GDP in 3Q) . The “8%” mentioned by the NBS may have been calculated with multiplying the REAL growth rate of the sector in 3Q2016 (8.8% YoY) with its NOMINAL share in 2015 GDP (6%) -- an estimate made under the assumption of a similar share of the sector in nominal and real terms. However, it is far from the case in reality. The contribution from the real estate service sector was much more pronounced in the nominal term year-to-date.

Therefore, the potential adverse impact of a slower property market may be more pronounced on nominal growth than on real GDP growth this time round, i.e. its dampening effect on corporate profitability may be larger than their total output volume. From a sectoral point of view, the impact of property market slowdown on real estate investment growth may be relatively moderate this time given the limited boost we have observed so far -- either on real construction activities and property investment growth. On the other hand, the reflationary impact on nominal real estate service growth has been relatively pronounced. However, as we have explained in our previous research, the boost to real estate service sector mostly reflects the change in wealth allocation rather than the overall production/income level, therefore, some of the adverse impact from slower property service growth may be compensated by the sector that benefits from re-allocation of wealth (away from property) going forward. Furthermore, property tightening also reduces inflationary exceptions and tightens overall financial conditions (assuming no monetary loosening towards other sectors in the near term). In addition, a more sluggish property transactions may also lead to slower free cash flow growth of the corporate sector, especially as the share of developer cash positions in non-financial listed companies has reached a 2-decade high (at ~13%).

The potential slowdown of wealth allocation into property may help lift consumption growth, especially discretionary consumption, in the next 6-12months. Property transaction value in the past 12 months (October 2015 - September 2016) reached RMB 11.1 trillion, 2.7 trillion higher than the level in the preceding 12 months. Assuming a 50% down payment ratio, net increase of down payment alone reached RMB 1.4 trillion in one year, or ~4.5% of total annual household disposable income in China. Since the growth of property price has outpaced that of personal income by a wide margin, and the down payment ratio has been raised substantially since 2009, it is no surprise that we started to observe a negative correlation between property transaction and large-ticket discretionary consumption items, especially during the "panic-buying" phase. As property transaction value growth picks up, oversea trips are likely to be put on hold, and vice versa. A similar pattern can be observed in discretionary consumption such as jewellry, precious metals, movie ticket, etc -- i.e. the spending that can more easily be put off. In addition, property related consumption tends to remain strong in the next 2 quarters, and wealth-effect from higher property price may also lift consumption in the next 4-5 quarters. Therefore, as the property market cools down, we expect the normalization of discretionary consumption to pick up some of the slack in growth.