China property downturn gathers pace
Further house price falls in December have heightened fears that a property crash will significantly drag down growth in 2012
Could a Chinese property crash be playing out before our (already very nervous) eyes?
China bears were growling loudly again on Wednesday as the governments latest house price data showed widespread price falls in December, just a day after headline economic data revealed a marked slowdown in sales and new starts, a rise in unsold properties and a slowdown in land purchases by developers.
Prices fell in 52 of the 70 cities tracked by the National Bureau of Statistics last month, up from 49 cities in November, with Chinas four largest property markets Beijing, Shanghai, Shenzhen and Guangzhou recording the third straight month of price declines.
With developers continuing to cut prices on unsold properties in major cities across the country, buyers remaining on the sidelines in expectations of further price falls and no sign that the government intends to loosen its restrictions on mortgage lending and second home purchases introduced over the past 18 months, most analysts believe that further price, sales and construction declines in the coming months are all but inevitable. Unsurprisingly, property developers were among the largest losers on mainland and Hong Kong markets on Wednesday, dragging down the overall indices in both Shanghai and Hong Kong, following a strong rally on Tuesday.
SocGen analyst Wei Yao didnt mince her words in a note to clients today:
|Todays report is consistent with the unambiguously deteriorating trends seen in property sales, construction, starts, and investments. The data just turned from bad to worse.|
UBS Wang Tao agrees that the property downturn is likely to get significantly worse in the coming months, predicting that overall property investment and construction growth will halve in 2012.
|The continued policy restrictions regarding commodity housing should lead to a decline in housing sales and starts, and broad-based weakness in the property sector in 2012.|
Why does a Chinese property downturn matter? The property sector is one of the primary drivers of investment growth in China, which in turn accounts for more than 50% of the countrys GDP growth. Chinas near-double-digit GDP growth has been driving the global economy ... you get the picture.
While there is plenty of evidence of the property slowdown eating into the broader economy, it has done little to date to dampen overall GDP growth to a significant extent. As Emerging Markets reported on Tuesday, headline GDP growth came in at a robust 8.9% y-o-y during the final quarter of 2011, the slowest rate of growth since early 2009, but above expectations.
But Yao believes that the property slowdown will begin to exert a noticeable drag on growth in the coming months:
|The economy as a whole has not felt much chill yet, but H1 2012 is going to be difficult for not just property developers. Contraction in sales and sharp deceleration in investments will send shockwaves along the industry chain, which is expected to drag the overall growth below the 8% mark in H1 2011.|
While sub-8% growth would be welcomed with open arms by policymakers in almost every other country, it would represent a significant slowdown for Chinese authorities, especially with the leadership transition occurring in the autumn. A prolonged property slump would also heap more pressure on indebted local governments, which derive around a third of their revenues from land sales to property developers. Among the most worrying numbers within the national economic data on Tuesday was that land space purchased for real estate development was 22.6% percentage points lower in 2011 than in 2010. Should prices and transaction volumes fall further, developers would likely be even less inclined to buy new land parcels from local governments.Against this, UBS Wang and others argue that the central government will accelerate efforts to build affordable housing, a key policy priority outlined by the government for 2012, and that this will at least partially offset the ongoing weakness in the commodity housing sector. We continue to hold the view that property investment will slow sharply but will not collapse in 2012 [and] reiterate our call that social housing can help prevent a hard landing in the property sector and in the economy, she wrote in a research report published on Tuesday.
Furthermore, the government has targeted stabilising house prices as a key policy objective, and is also acutely aware of widespread public anger at rapidly rising prices, which have priced many would-be buyers out of the market. A study by the Chinese Academy of Social Sciences last year concluded that house prices were now "unaffordable" for 85% of the population.
In light of all of this, what are the chances of the government relaxing some of its property restrictions, in a bid to kickstart the countrys flagging property market?According to Ting Lu, Xiaojia Zhi and Weijun Hu, Bank of America-Merrill Lynch:
"We expect no major easing on property tightening, but Beijing could allow slacker enforcement of home purchase restrictions in lower-tier cities."
UBS Wang sees the focus in the short-term as being on accelerating affordable housing buildout, rather than unwinding restrictions, but agrees that this could be a possibility in lower-tier cities, though not in Beijing, Shanghai and other first-tier cities and would only happen should property prices, sales and new starts continue to fall during the first quarter of 2011.
In other words, itll likely get worse before it gets better, and dont expect an immediate policy response.
And with every new data point suggesting a further property slowdown, expect the growling to get louder.