China's property market recovery is not easy
If one word is used to describe China's property market in 2015, "differentiation" may be the most appropriate.
Differentiation among sales regions: strong rebound in first-tier cities, poor performance in third- and fourth-tier cities
Let’s first look at the sales market. In the first 10 months of last year, the sales area of newly-built commercial residential buildings nationwide increased by 7.9% year-on-year. Over the same period, the growth rate of 40 major cities was 23%, while the sales area of new houses in the four first-tier cities increased by 52%. Statistics show that the more developed regions are, the better the property market last year. The main reason for this is the difference in market supply and demand. In developed cities, the inventory pressure of new houses is small and the population is growing rapidly. Supply is less than demand, which makes the price and volume rise; while the housing stock in third- and fourth-tier cities is high, but the population growth is slow, and even many areas have experienced negative population growth, and the housing market performance is also sluggish. It makes sense.
Behind the overall rebound in real estate sales last year, the main driving force was policy stimulus. The current round of property market stimulus policies began in 2014, when the national property market sales fell for the first time since 2008. In order to stabilize the property market, a series of market rescue policies have been introduced one after another. From the middle of last year, the purchase restriction was gradually cancelled. By the end of September, the “930” second home loan was loosened. This series of policies finally promoted a sharp rebound in the property market in the fourth quarter of last year.
Construction and sales differentiation: real estate sales pick up, new construction continues to be sluggish
In addition to the differentiation between cities, another differentiation in the property market last year was between construction and sales.
Although the overall property market sales rebounded last year, construction activities were still sluggish, and the newly-started area of houses nationwide continued to grow negatively. According to the current trend, it is expected that the newly-started area for the whole year will experience a 10% annual drop again on the basis of the 10% drop last year. The reason for the continued decline in new starts is that the property market inventory is still at a high level.
According to the quantitative relationship between the area for sale, saleable and construction at the city level, we can roughly estimate that the national inventory digestion cycle (approved pre-sale caliber, including under construction and completion) is about 30 months, which is close to the stock data The level of third-tier cities. As a reference, the current inventory digestion cycle in first-tier cities is about 10 months.
What are the disadvantages of high inventory? The direct consequence is a decline in new starts. New starts are the leading indicator of construction. The decline in new starts has led to a decrease in the total construction volume, and the construction volume and real estate development investment have also changed simultaneously. Therefore, the growth rate of real estate development investment in the past two years has also continued to decline. 12% dropped to 2%. Due to the huge scale of domestic real estate construction activities, it directly affects many upstream industries, such as steel, cement, non-ferrous metals, machinery manufacturing, and so on. Therefore, the decline in new real estate starts has a huge impact on the overall domestic economy.
Means to resolve inventory: Provident Fund to Housing Bank
The policy efforts of the past year have told us that the existing measures such as interest rate cuts, RRR cuts, tax cuts, and provident fund relaxation, including down payment, have little effect on solving the country’s high inventory problem. So what other measures can solve the inventory problem?
First of all, under the background that new construction starts across the country may still have a negative growth this year, the real estate policy will still maintain a situation of loose support. The current policy directions, including interest rate cuts, RRR cuts, tax cuts, provident fund relaxation, and down payment reductions, are expected to continue. But these policies, including the rumored tax rebate for buying a house, are more beneficial to developed cities. Therefore, to resolve the problem of high inventory in third- and fourth-tier cities and transform the existing provident fund system into a housing finance bank may be the only feasible and most likely solution to be adopted by the management. The reasons are as follows: The current high inventory in third- and fourth-tier cities is that the property market has developed too fast in the past two years, and local families generally do not lack houses; at the same time, population growth is slow, and future new demand is insufficient. In this context, to increase local housing demand, there are only the following options: First, the price of new houses will be drastically reduced. The result will inevitably lead to a decline in the value of land, affecting land sales income, and more importantly, affecting local government debt that uses land as collateral, so it will not work.
The second is the demolition and relocation of old buildings. This works in big cities, because the land is limited and the value is high, and the redevelopment of old districts is commercially profitable. However, in small cities, land resources are sufficient, and the demolition and resettlement are necessary to pay for the inventory, so it is not feasible;
The third is to accelerate urbanization, attract the inflow of rural population, and adjust the industrial structure to provide more local jobs. Increase housing demand by increasing the population. But this can only be a long-term goal, and it is difficult to achieve in the short term, and it is difficult to quench the thirst of near water;
Fourth, the provident fund loan quota has been greatly increased, and interest rates have been greatly reduced. This program is equivalent to a low-interest loan provided by the government to buyers, if you do not buy a house, you will not be able to enjoy it. This has a great stimulus effect on housing demand.
In order to achieve the above objectives, the existing provident fund system must be reformed. In addition to making the application of provident fund more convenient, it is more important to solve the problem of loan amount. The amount of existing provident fund loans is limited to the total amount of accumulated deposits. When the property market is booming, there are often news that the amount of provident fund in a certain place is insufficient to restrict lending. The securitization of housing mortgage loans will solve this problem. In fact, this work has been gradually implemented.
2016 property market forecast
In addition to the above macro analysis, there are some other points worth paying attention to in the property market in 2016:
Although the national property market as a whole is still in a difficult process of destocking, some developed cities have taken the lead in recovering. Except for first-tier cities, some second-tier regional central cities are expected to perform better. The common characteristics of these cities are good fundamentals, low stock of new houses, stable population growth and reasonable age structure, and mature second-hand markets. These cities include Suzhou, Wuhan, Hefei, Chengdu, Nanjing, etc. At the same time, the benefits of the two-child policy to second-tier cities will be more obvious than those of first-tier cities.
For developers, since most of the main sales of listed real estate companies come from the top 50-60 key cities, the real estate market in these cities has taken the lead in stabilizing, which will be good for national developers. At the same time, the decline in domestic bond financing costs will also benefit large-scale listed real estate companies. Therefore, it is expected that the sales scale of large-scale real estate companies is expected to continue to increase this year.
The first-tier cities will continue to lead the national property market, but the transaction volume may fall from last year, mainly because the previous backlog of improvement demand has been concentratedly released. However, in the long run, due to the stable housing demand provided by population growth in first-tier cities and limited land supply, the property market will still perform better than small and medium-sized cities in the future. Especially in the second-hand housing market in first-tier cities, there is still a lot of room for growth in the future, but the competition in the second-hand intermediary industry will also become increasingly fierce. Healthy competition is conducive to improving the service level of the industry, and only companies that meet customer needs and have profitability can ultimately win.