China's property recovery to continue despite tightening

(ATF) Shenzhen’s property market must be among the very few sectors in the global economy where government policy has shifted towards cooling activity. City officials on 17 July announced the first significant local property tightening measure in China since the pandemic started.

The measure is an enhanced version of Shenzhen’s existing home purchase restrictions. By raising the threshold for purchase eligibility, it shrinks the pool of homebuyers eligible to buy a local property.

It comes in response to rising price pressure and the idea is to tap on the brakes, not bring things to a standstill. A handful of other leading Chinese cities have announced property market policies over the last month.

Building home price pressure in leading Chinese cities comes on the back of a robust property market recovery. Sales volume in our 52-city index has been above year-earlier levels since May and was up 10% year-on-year in July.

The property market recovery in leading Chinese cities is not the result of major housing market and economic stimulus, and thus differs from that in the wake of the global financial crisis. Between August 2008 and May 2009, the PBoC cut the benchmark lending rate by 216 basis points, as well as reducing minimum downpayment ratios for home purchase. The government also reduced taxes on property transactions.

This time round, the five-year loan prime rate – the benchmark for housing loans – has fallen just 15 basis points, and there has been no change to minimum downpayment ratios, nor tax incentives for property purchase.

Damage control strategies

Instead, the property market recovery is a result of broader liquidity easing coupled with China’s success in controlling the pandemic, reviving production and minimising job losses. This has preserved the purchasing power and bolstered confidence of its home-buying class.

China’s initial economic policy response to the domestic Covid-19 crisis was damage control. Policy was aimed at keeping tens of millions of businesses alive, including via trillions of yuan of targeted cheap loans, and getting people back to work safely, especially the nearly 300 million migrant workers who had gone home for Chinese New Year.

The damage control policy was effective in keeping businesses and jobs alive. As a result, the rise in [urban] unemployment in China was much less than in other major economies, especially for salaried white-collar workers with permanent job contracts.

This damage control phase was evident in low market rates. One-year government bond yields, which averaged 1.9% in March fell to around 1.2% from early April until mid-May. Although the PBoC has since raised one-year (and other tenor) rates to squeeze out financial arbitrage opportunities, market rates are generally still below last year’s levels.

Besides relatively easy monetary policy, domestic liquidity conditions have been boosted by capital inflows. Foreign holdings of domestic bonds rose by 319 billion yuan in the first half, over twice the increase in the year-earlier period.

China’s safe haven status stems from its handling of Covid-19, especially the secondary outbreaks in Beijing and the northeast, and the relative health of its economy in a contracting global economy. China’s GDP grew 3.2% year-on-year in Q2 after contracting 6.8% year-on-year in the first quarter, the worst figure since the National Bureau of Statistics began estimating quarterly GDP in 1992.

That said, China’s economic recovery is uneven and only just getting going. The Politburo held its mid-year meeting on 30 July, setting the economic policy tone for the rest of the year. Given economic uncertainties and the need to support domestic demand, it called for a “reasonable” growth in the money supply, reduced financing costs and precision channelling of funding to manufacturing and small, medium and micro-sized enterprises.

Curb on housing speculation

On property policy, the Politburo tone was balanced, calling for policy to curb housing speculation, while promoting property sector “healthy and steady” development.

The upshot then is both economic and property policy are likely to see fine-tuning rather than dramatic changes in the rest of the year.

Liquidity policy settings are likely to remain relatively easy, both to support the economy and to accommodate increased government bond issuance to finance infrastructure and improve public health facilities. There is a need for policy flexibility given the risks of exports being dragged down by weak global demand and of flare ups in US-China relations, particularly in the approach to the US elections in November.

The outlook for property market policy is also for recalibration rather than a dramatic shift. China’s economy needs the property engine to be firing as the recovery continues. Most of China’s 600-plus cities are still far behind Shenzhen in the property market recovery cycle, including some with high stocks of unsold housing on the market.

One advantage is that intervention has come earlier in the cycle. Even in the most heated cities, the rate of price growth is far below that of earlier peaks. Shenzhen new residential home prices rose 5.3% year-on-year in June 2020 compared with 63.4% year-on-year in April 2016, according to NBS data.

At the national level the regulatory focus will be to control specific issues that increase financial risk, such as the illegal use of consumer or business loans to pay for home down-payments. In a similar vein regulators recently cracked down on unlicensed margin lenders for stock purchases.

At the local level, cities will respond to local market conditions. Given the recovery momentum in the property sector, more cities are likely to tighten than loosen economic conditions over the rest of the year. This is back to the tightening trend seen in March 2016 until August 2018, during which our China Property Policy Index rose from 19.1 to 26.0.

This means city rotation, for example, indicated in the names of cities in the top 10 ranking of home price growth.

Large developers with national development portfolios have the flexibility to adapt to this by timing project development and sales in accordance with the property market cycle in different cities, as well as in making the right land purchases.

Moreover, broad liquidity conditions are expected to remain supportive, lowering property development financing costs. Overall, despite more headlines of city-level tightening, the H2 outlook for many property developers is bright.