For Western European economies or for the United States, a rise in home prices would be a breath of fresh air after years of depressed housing markets.
But for Chinese policymakers, news over the weekend from the National Bureau of Statistics (NBS) that new home prices increased in July after rising in June was anything but that.
Reuters calculates a nationwide index of new home prices based on the NBS data - which contains prices for medium to large cities - and according to this index prices increased by 0.1 percent month-on-month in July across China. They remained flat in June although they went up by 0.3 percent and 0.2 percent in Beijing and Shanghai respectively.
New home prices had fallen by between 0.1 percent and 0.3 percent every month since last October.
”I think it’s clear that the prices are rising. Basically what they [the policymakers] least hoped for is happening,” Wei Yao, China economist at Societe Generale told Emerging Markets.
“It’s not just one month, it’s something surprising to the authorities and it does limit their scope for easing, be it interest rate cuts or reserve requirement ratio (RRR) cuts,” she added.
“Clearly they have these concerns that if they do send more signals of easing they will create expectations that home prices will not fall.”
After worse than expected data on bank loans in July, economists had forecast that the People’s Bank of China (PBOC) would cut RRR within days.
The better than expected home prices data was a factor behind the fall in Asian stock markets on Monday as the possibility of monetary easing has receded somewhat, according to Bank of Tokyo Mitsubishi analysts.
SALES RISE
Larry Hu, China economist at Bank of America Merrill Lynch, noted that the number of cities with new home prices rising consecutively doubled to 50 in July from June.
Sales “continued the upward momentum” in July, Hu also pointed out. In terms of volume, new home sales reversed their 3 percent fall from June to advance by 13 percent in July while in value they jumped by 25 percent from June’s 7 percent advance.
The growth in fixed asset investment (FAI) in property was 9.6 percent year-on-year in July, down from 11.8 percent in June and “significantly lower” than the 16.6 percent level in the first half of the year, Hu wrote in a research note.
“New starts fell 26.7 percent yoy in July after dropping 16.3 percent in June, suggesting developers are still concerned about further policy tightening,” he added.
China introduced property tax trials for those who buy second homes in Shanghai and in Chongqing in January 2011 to try to curb speculation in the property sector and rises in home prices, and some analysts think these curbs will be extended.
“There are very limited options [for the authorities], at least in the short term. I think they are considering expanding the property tax trials,” Yao said. “But these things take time to work.”
“In the short term I think the only thing they can do is to be very careful in terms of monetary easing.”
High prices for new homes are the main culprit behind China’s famous ghost towns – thousands of apartment blocks finished but in which nobody actually lives. Yao said this was because of the big income gap in China but that there was still demand for housing in the country.
Introducing taxes on second homes across China would kick-start the secondary market, where transactions are “relatively limited,” because it would force people who bought property speculatively in the hope the market will keep rising to sell some of their properties, Yao said.
Larry Hu does not believe that the bounce in home prices will prevent the PBOC from easing policy for long, because the July macroeconomic data shows that “growth stability is further threatened.”
“We expect an RRR cut soon and another interest rate cut is in the pipeline,” Hu said. “In total we expect two 25 basis points rate cuts and three 50 basis points RRR cuts before year-end.”