On the morning of 11th October 2011, the city of Foshan, a third tier city located next to Guangzhou, announced that it would ease home purchase restrictions. The news quickly spread across the country within a few hours. However, later that same day, the relaxation was cancelled after the local government “took the impact of the easing into consideration”. This dramatic U-turn confirmed our view that the Central government can probably afford to wait three to six more months before market conditions compel them to begin loosening policy. This is because the current tightening policies have only recently started to achieve the desired result of taming price growth. Many second tier cities in the Yangtze River Delta region witnessed some meaningful price corrections in the past three months, while cities in northern and western China posted much slower price growth as illustrated below.

Figure: High-end Residential Capital Value Clock, 3Q11

Note: The concentric circles represent Jones Lang LaSalle’s assessment of the volatility and maturity of the residential sector in each of the respective markets.

Despite the discounts or other incentives offered by developers, most of the eligible buyers chose to remain on the sidelines and wait for further price corrections. Many other buyers remain blocked from the market due to the purchase restrictions. Total residential sales volume for the 19 cities (excluding Chongqing) in the above figure posted a further slide of 2% q-o-q or 26% y-o-y in 3Q11. With sales remaining weak and access to bank loans getting harder even at higher interest rates, developers will only get more anxious before getting any better. Given the current policy stance, it seems inevitable that the housing price decline will broaden as more developers will have to cut their sales price in order to spur sales in the upcoming 3-6 months. Nonetheless, cash-rich developers and institutional investors are being presented with more investment opportunities to pick up some distressed projects in the residential market. Such opportunities nearly disappeared in 2009 and 2010 when bank loans were easy to access and residential sales were strong.

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