In the past several weeks, China’s residential market has been flooded by media reports about price cuts and policy easing in a number of cities across the country. We see parallels with what happened two to three years ago from mid-3Q11 through 2Q12. So what can we learn from history?
As illustrated in the chart below, after a slew of tightening measures were introduced in 2010, sales volumes declined significantly through 2011, which led to a price correction toward the end of the year. At that time, local governments in several cities like Foshan and Chengdu attempted to ease some of the restrictive measures in order to revive residential sales. Coming into 2012, the People’s Bank of China (PBoC) – the central bank – announced cuts to the lending rate and actively ‘encouraged’ banks to improve mortgage availability. Policymakers moved to offer greater discounts on mortgage rates for first time homebuyers, which, coupled with further price discounts from developers, led to a strong rebound in transaction volumes and consequently a rally in prices.
Note:
1) The 20 cities include 4 Tier I cities (Beijing, Shanghai, Guangzhou and Shenzhen) and 16 Tier II cities (Changsha, Chengdu, Chongqing, Dalian, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Suzhou, Tianjin, Wuhan, Wuxi, Xiamen, Xian and Zhengzhou);
2) The price changes are based on the 100 Cities’ Price Index produced by CREIS
Source: JLL, CREIS
Current market conditions echo the ones of 2011 and 2012. The measures introduced in 2013 and tightening in the mortgage market since 4Q13 has resulted in a substantial decline in sales volumes across major cities in the first two months of 2014. A handful of Tier 2 and 3 cities have started to see price corrections, as some developers choose to offer discounts on their projects to spur sales. Some cities, such as Tianjin and Ningbo, are reported to have eased HPRs. We have also seen selective cities announcing efforts to normalise mortgage lending standards and availability, as well as recent announcements from the PBoC urging banks to increase mortgage availability for first time home buyers.
Looking forward, we believe more local governments will attempt to selectively loosen some of the restrictive measures, which, combined with price discounts, is likely to contribute to a recovery in sales. In the absence of a more sustained recovery in sales across the country, policymakers could well use levers such as changing how second homes are defined.
In spite of the fine tuning in mortgage policies, we still expect to see price corrections in more Tier 2 and 3 cities in the upcoming months, due to high inventories and large supply pipelines. However, we think price corrections will probably be short-lived, given that developers have been able to successfully lure buyers back to the showroom when offering discounts. This indicates to us that market mechanisms are working and that buyer sentiment remains intact, much as it was in 2012. Therefore we conclude that concerns over an immediate collapse of the market are overplayed and the housing market is likely to stabilise in the coming several months.
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