China’s ambitious rescue package for its crisis-hit property sector has not impressed investors and analysts, with some cutting their forecasts as oversupply and weak demand continue to pressure prices.
According to China Real Estate Information Corp. (CRIC), new home sales in China’s 30 major cities in May totaled 10.8 million square meters, up 4 percent from April, up 23 percent from the monthly average of 8.77 million square meters in the first quarter, but down 34 percent from May last year.
“We expect new home prices to fall 5-10 percent for the full year, but not significantly compared with the period before the policy was introduced,” said Raymond Cheng, managing director at CGS International Securities Hong Kong, adding that increased foot traffic has not translated into a proportional increase in sales.
“Property developers have seen sales improve but not as rapidly as expected. This has yet to translate into higher transactions and prices as buyers remain cautious,” he said, citing feedback from six major property developers including China Overseas Land Investment, China Resources Land and Longfu Group.
China’s housing market crisis, triggered by Beijing’s “three red lines” policy launched in August 2020, has left weak real estate developers starved of capital and led to more than $160 billion in junk bond defaults, according to Goldman Sachs estimates. Existing home prices have fallen 20% from their peak, while new home construction has fallen 16%, according to the investment bank.
In response, Beijing announced a historic rescue package that included cuts in mortgage rates and down payments to revive the housing market, which at its peak accounted for a quarter of China’s economic growth, and a 300 billion yuan re-lending facility to buy unsold homes from struggling property developers.
For example, all 422 units in a new luxury housing project in Shanghai’s Putuo district, with an average price of 104,000 yuan per square meter, were sold within two hours of going on sale on June 3, local media Street News reported. New home sales in Shanghai rose 35% in the week of May 27, the week after Shanghai authorities relaxed home-purchase restrictions and offered subsidies to attract buyers, according to data compiled by Shanghai-based Centaline Property.
However, such bright spots are few and far between, with a lack of price stability in both primary and secondary markets and pressures to liquidate excess inventory hampering any efforts to normalise.
“Price wars are still ongoing between homeowners and would-be buyers,” said Yu Liangzhou, owner of Shanghai real estate agency Baono, adding that he doesn’t see prices recovering in the near future.Shanghai’s housing market has been cooling since the start of the year, with home transactions in the first five months falling 43 percent from a year earlier, according to data from CRIC.
“Shenzhen home prices have not yet changed and developers are rushing to discount prices to clear inventory,” said Andy Li, China CEO of Zhongyuan Real Estate.
“Buyer confidence is very weak and buyers will walk away unless they see prices have bottomed out,” Li said, adding that falling prices are raising concerns about a shrinking wealth effect.
Of the 30 major cities tracked by CRIC, only four showed signs of improving de-inventory trends in May compared to the previous month, but CRIC said the de-inventory cycle is longer than last year in all 30 tracked cities, with 20 of those cities expected to take 18 months or more to de-inventory.
Credit analysts are more pessimistic. Fitch Ratings on Wednesday lowered its home sales forecast for this year, now expecting a 15% to 20% drop in the current year, down from a previous forecast of a 5% to 10% drop. The firm also expects new home prices to fall 5% this year.
“Previously, we had expected price tensions in smaller cities to continue to balance out this year as sales mix shifts towards top-tier cities, but recent trends indicate prices will fall more sharply than previously forecast, especially as average selling prices in top-tier cities are also starting to come under significant downward pressure,” the analysts, led by Thailan Kam, said in a note.
This secular downward trend will have long-term implications.
“Our secular housing outlook predicts average residential demand of 800 million square metres,” Fitch said, adding that the figure was “significantly lower than in past years, suggesting that the trend towards sector consolidation is likely to continue unabated anytime soon.”
