China’s residential properties have seen strong demand, and three factors are driving it, according to Linan Liu of Deutsche Bank.

Data released Thursday by the National Bureau of Statistics showed that new home prices in May were up 4.9% from a year ago, compared to a 4.8% increase in April.

Average new home prices in 70 cities also rose 0.6% from April, the same growth as in April from March.

Real estate investments have been “quite strong,” while investments in manufacturing and infrastructure have fallen short of expectations, said Liu, head of macro strategy for Greater China at the bank.

In the household sector, “there is still a fairly robust demand for properties, whether for upgrading or for primary residence,” she told CNBC’s “Street Signs Asia” Thursday.

Increase in urbanization

One of the factors driving demand is the increasing pace of urbanization, she said, noting that at the end of 2020, China’s urbanization rate was around 64%.

Farmers plow the soil in a vegetable garden in front of residential buildings on the outskirts of Shanghai, China on Sunday March 14, 2021.

Qilai Shen | Bloomberg | Getty Images

“We expect the ratio to increase over the next five years to around 70% or 75%,” she said. “I think the urbanization campaign will continue to support demand from the real estate sector.”

If cities become more crowded and demand exceeds supply, prices could rise.

Three-child policy

Another factor is China’s new three-child policy, Liu said.

In a major policy change, the central government said last month that couples would now be allowed to have up to three children instead of the previous limit of two children.

“It may stimulate demand for larger properties, upgrading etc. It will continue to support demand, especially in big cities – tier one, tier two cities,” she said.

A research note from Nomura indicated a 0.7% increase in house prices in level one and level two cities, compared with a 0.4% increase in level three and four cities.

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China faces the challenges of a rapidly aging population, which has economic consequences, including slower productivity growth. The data shows a decline in births, as population growth slowed to its lowest rate since the 1950s, prompting a change in policy.

Still, it’s unclear whether the new policy will encourage people to have more children. After the announcement, more than 30,000 people polled online in a poll by the state-run Xinhua News Agency said they did not plan to have more children because of the new policy..

Improve the job market

Finally, an improving job market could fuel demand for properties, Liu said.

The overall unemployment rate for cities in China fell to 5% in May – the lowest since May 2019, Reuters reported.

“With improving labor market conditions and better income growth, I think consumers or households are still looking for (an) upgrade or buying primary (residences),” Liu said.

However, Nomura analysts said they expected Beijing to “strictly enforce its measures to tighten financing in the real estate sector.”

“We think this could put more downward pressure on growth” in the second half of the year – particularly in the fourth quarter of 2021, they wrote.

– CNBC’s Evelyn Cheng contributed to this report.

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