In late July, the State Council announced to send out an inspection team to 16 provinces and municipalities to gain a deeper understanding of the latest recovery in the residential market. The announcement came after a number of major cities in China witnessed a strong rebound in residential sales volume and a slowing pace of decline in housing prices in May and June. This caused speculation in the market that the Central government might introduce a new round of tightening measures to curb housing prices. In our opinion, we are highly unlikely to see any new tightening measures in the next few months. Instead, we expect to see the continued loosening of mortgage policies (i.e. down payment requirements and mortgage rates) to help improve the affordability of first-time home buyers, who have been and will continue to be the encouraged participants in the market.

The sustainability of the volume rebound in the housing market is also crucial to the recovery of China’s economy. Land sales are a very important source of the local government’s revenue. With sales volume picking up, developers have begun to be more active in land acquisitions. For instance, Vanke has spent nearly RMB 6 billion to acquire new land plots in Hangzhou, Ningbo, Chongqing, Chengdu and Shanghai since July. Other developers, such as Poly, COLI, Evergrande, Longfor and Greenland have also spent a considerable amount of capital on new land acquisitions over the past three months. Looking ahead, if the sales momentum in the market continues, we could expect developers to become more willing to start construction on new projects, a key component of fixed capital formation.

Looking ahead, given the large amount of new supply in the pipeline, we do not expect developers to gain the pricing power needed to raise sales prices over the next several months. Instead, in most cities the residential sales market will continue to favour buyers. However, investors who have been sitting on the sideline for over two years due to the home purchase restrictions (HPRs) are keen to enter the market, and many local governments are attempting to loosen their restrictive measures. This presents greater challenges for the Central government in enforcing the implementation of HPRs at the local level. We believe it is against this backdrop that the State Council decided to send out inspection teams to investigate the implementation of the tightening measures at the local level.

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