China’s ambitious rescue package for its crisis-hit property sector has impressed neither investors nor analysts, some of whom have lowered their forecasts as prices remain under pressure amid a mammoth supply overhang and tepid demand.
In May, 30 major Chinese cities recorded a total transaction volume of 10.8 million sq m in new home sales, an increase of 4 per cent when compared with April, according to China Real Estate Information Corporation (CRIC). It advanced 23 per cent versus the first quarter’s monthly average of 8.77 million sq m but fell 34 per cent when compared with sales volume in May last year.
“We estimate a full-year decline between 5 and 10 per cent for new home prices this year, not much has changed versus the pre-policies period,” said Raymond Cheng, managing director of CGS International Securities Hong Kong, who added that the jump in footfall traffic had not translated into proportionate increase in sales.
“Developers saw their sales improve but not rapidly as expected. It has not yet translated into a rally in transactions or prices, as buyers remain cautious,” he said, citing feedback from six major developers, including China Overseas Land and Investment, China Resources Land, and Longfor Group.
China’s housing market crisis triggered by Beijing’s “three red lines” policy launched in August 2020, starved weak developers of funds and triggered more than US$160 billion of junk-bond defaults, according to a Goldman Sachs’ estimate. Secondary home prices have slipped 20 per cent while new home construction weakened 16 per cent from their peaks, the investment bank said.
In response Beijing announced a historic rescue package, which included mortgage rate and down payment reductions in a bid to revive the housing market, which accounted for a quarter of the country’s economic growth at its peak. It also included a 300 billion-yuan relending facility to finance the purchase of unsold homes from troubled developers.
For example, all 422 units of a new luxury project in Shanghai’s Putuo district, which was priced at 104,000 yuan per sq m on average, were snapped up two hours after it was launched on June 3, local media Jiemian News reported. New home sales in Shanghai jumped 35 per cent during the week of May 27, the week after the city’s authority relaxed home-purchase restrictions and offered subsidies to lure buyers, according to data compiled by Centaline Property in Shanghai.
But such bright spots are few and far between as price stability eludes both primary and secondary markets, while the pressure of clearing excess inventory hangs like Damocles’ sword over any effort to achieve a return to normalcy.
“There still remains a price game between homeowners and prospect buyers,” said You Liangzhou, owner of property agency Baonuo in Shanghai, adding that he does not envisage a price recovery in the near future. The city’s market has been cooling since the start of this year, with overall home transactions falling 43 per cent in the first five months versus a year ago, CRIC data showed.
“Home prices in Shenzhen are yet to change, and developers are rushing to offer discounts to clear inventory,” said Andy Li, China CEO of Centaline Property Agency.
“Buyers’ confidence is very weak, and they would stay away unless they see a price bottom,” Li said, adding that the declining prices were sparking concerns about the shrinking wealth effect.
Only four out of 30 major cities tracked by CRIC showed signs of improvement in destocking trends in May compared with the previous month. However, the cycle of destocking in all of the 30 tracked cities was more lengthy than last year, CRIC said, with 20 of them expected to take more than 18 months to reduce stockpiles.
Credit analysts have taken a dim view of the situation. Fitch Ratings on Wednesday lowered its sales estimates for the year, and now expects a drop of 15 to 20 per cent this year, versus previous forecast of a 5 to 10 per cent decline. It also expects a 5 per cent drop in new home prices this year.
“Our previous expectation was that the sales mix shift towards higher-tier cities would continue to balance out price tensions in smaller cities this year, but recent trends indicate a more intense decline in prices than previously forecast, especially as average selling prices in higher-tier cities also begin to see greater downward pressure,” analysts led by Tyran Kam said in a note.
This secular downtrend has long term implications.
“Our long-term housing outlook forecasts an average housing demand of 800 million sq m,” Fitch said, adding that the figure is “significantly lower than in previous years, suggesting the trend of sector consolidation may not abate for some time”.