Real estate special (July No. 4): The Good, the Bad and the Soft

The good news is that new house prices continue to rise; the bad news is that new house prices continue to rise......

Tautology or not, it is, on the one hand, encouraging to see that house prices in China continue to rise (+4.1% in June year-on-year), which underlines the vibrancy of the economy. The risk is, though, that the Government will throw the baby out with the bathwater of (even more) property market restrictions.

Indeed, it should take the month-on-month temperature of the water (an increase of +0.1%) as a guide to it getting cooler. Raised interest rates and reserve ratio requirements, higher deposits levels (now 30% for first time buyers; and in some cases 40%) and, the most incisive, HPRs or house purchase restrictions are doing their job; and the latter are to be extended now to tier 2 and 3 cities. As JLL eloquently says, the Government wants stabilisation in prices, not to drive them down i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It is also stoking up the supply of affordable houses (36 million over the next five years).

Right now, the Government needs to be patient and I believe it will be. And just like the economy at large, this key sub-sector will land ‘at a sufficiently low velocity for the equipment or occupants to remain unharmed’.

“I don't believe in pessimism. If something doesn't come up the way you want, forge ahead. If you think it's going to rain, it will”
- Clint Eastwood

DETAIL

NEW HOME PRICES IN THE PRC, JUNE 2011 (% CHANGES):
Nationally: +4.1 year-on-year (+4.1 in May); and +0.1 in month (+0.2 in May)
Beijing: +2.2 yoy (+2.1); & +0.0 (+0.1)
Chongqing: +5.8 yoy (+5.2); & +0.0 (+0.2)
Guangzhou: +5.4 yoy (+5.1); & +0.2 (+0.3)
Shanghai: +2.2 yoy (+1.4); & +0.1 (+0.2)
Shenzen: +4.6 yoy (+3.7); & +0.1 (+0.4)
Tianjin: +3.9 yoy (+3.4); & -0.2 (-0.3)

New home prices rose in June by 4.1% and in 67 out of 70 Chinese cities, monitored by the National Bureau of Statistics; the same numbers as in May. It is also the case that in a majority of cities, June’s rate of annual increase exceeded that of March. On a month by month basis, though, the rate of increase nationally was just 0.1% which is down from +0.2% in May; and this is the sixth month in a row that the monthly rate has dipped against the previous one.

In Beijing and Shanghai the rate of annual increase in June was higher than May (albeit below the national average). This was especially true of Shanghai (2.2% versus 1.4%) which showed the largest points gain of the six selected cities above. Gains here also came despite Government constraints on the market.

Once more, on a monthly basis, too, it is a more stark picture – and here Shanghai slowed from +0.2 to +0.1%, while Beijing was flat in June against May’s +0.1% (meantime, existing home prices in Beijing were up by an annualised 1.4% in June from a year ago, while in Shanghai they increased by 2.4%).

Finally, in terms of extremes, Urumqi in Xinjiang Province posted the biggest gain in new house prices in June at 9.2% yoy in June, while Sanya on Hainan island experienced the biggest fall of 2% last month on a year ago.

As noted previous, the value of national residential sales in H1, rose 22% to Yuan 2.1 trillion; and in the month of June alone by 31% to Yuan 499.2 billion.

In JLL’s view, the price increases in Shanghai and Beijing are modest and reflect, in particular, the home purchase restrictions (HPRs) which have probably been the most strictly enforced here. These work on the basis that per household you cannot own more than two units in any of 36 cities. In turn, this means that at the top end of the market in Beijing, prices are beginning to come down.

However, the Government wants stabilisation in prices, not to drive them down, continued JLL i.e. the primary intention is to flatten prices out and stop them rising faster than incomes. It also said that most of the large developers are quite optimistic and that they are taking market share from smaller local developers. Nonetheless, inventories are rising. For example, housing starts rose 40% last year and, to date in 2011, sales are running at 22%. In the same vein, GF Securities said that unsold homes in 11 major cities reached 634,000 units as of 10 July, which will take 9.8 months to de-stock based on the current rate of sales.

ANZ took a slightly different tack. “China has negative interest rates right now with high inflation, so it’s not surprising that people are back to higher yielding assets, such as real estate”. However, it added, that any more home purchase restrictions will force developers to cut supplies and push up home prices again. “This will go against the Government’s will to control home prices”.

Credit Suisse added that “China is still largely a policy driven market. The Government is still confident it can manoeuvre it. We do see the market continue to weaken, but we’re not pricing in any hard landing”.

Finally, Cheung Kong Holdings, controlled by Hong Kong billionaire Li Ka-shing, also said that it was “proper and adequate” for China to cool down its real estate market. Rising home prices run the risk of becoming a social problem, said Executive Director, Justin Chiu, in Shanghai, where he showcased three new projects. “We do hope prices will remain stable, otherwise the Government will take more action. As a property developer, we don’t want prices to rise too quickly either and want prices to be stable”.

China will expand its efforts to control the growth in residential prices to smaller cities after limiting home purchases in Beijing and Shanghai, according to the State Council. It said that so-called second and third tier cities, which have seen excessive price gains, should restrict the number of homes each family is allowed to buy. It is also reported that commercial banks are restricting individual property loans.

For its part the State Council said “the property policies are at a critical moment. We must strictly uphold the direction of the curbs and won’t ease the tightening measures”. The Government will also seek to constrain residential rental growth and it has committed to building 36 million units of social or affordable housing over the next five years, with up to 10 million coming this year (although this 2011 target seems optimistic). Similarly, Premier Wen Jiabao said “we will unswervingly implement property tightening measures. We will continue curbing irrational housing demand, increase efforts to build affordable and modest homes”.