China oversupply means rate cut has limited value
Published 29/10/2015 | 02:30
China's moves to ease mortgage restrictions and cut interest rates are bearing fruit in the nation's smaller cities, where home prices have staged a recovery. Now comes the bigger challenge: Clearing a supply glut to spur investment by developers.
Lower borrowing costs are helping a residential market recovery spread from the economic hubs such as Shanghai and Shenzhen to smaller and less-prosperous cities. New-home prices rose in September from August in more than half of the 70 major cities monitored by the government for the first time in 17 months. Yet, a construction boom over the past two years has led to 424.7 million square meters of unsold homes languishing nationwide as of September 30.
Reviving investment in real estate is crucial for the government, which on Friday stepped up monetary easing with its sixth interest-rate cut in a year and scrapped a ceiling on deposit rates as part of efforts by Premier Li Keqiang to find new engines of growth. China cut the deposit first-time homebuyers in smaller cities need to put down last month and is targeting oversupply-plagued cities that account for about 85pc of sales nationwide, according to China International Capital.
"The biggest factor damping the momentum in economic growth now is the slowdown in investment," with property being the main hindrance, said Liu Xuezhi, a macroeconomic analyst at Bank of Communications in Shanghai. "Although home prices have rebounded in first-tier cities, sales and investment in some second- and third-tier cities are still under pressure."
The real estate industry contributes almost 30pc of gross domestic product, according to Nomura Holdings.
Authorities are seeking to bolster an economy that is forecast to grow at the slowest annual rate in a quarter century, as drivers of growth such as construction and manufacturing have stumbled. China cut the one-year lending rate to 4.35pc from 4.6pc effective Saturday, while the one-year deposit rate will fall to 1.5pc from 1.75pc. The People's Bank of China also scrapped a deposit-rate ceiling that limited the rate banks could pay savers.
With the deposit rate having now dropped below inflation, at 1.6pc in September, property sales may beat expectations in the fourth quarter as negative interest rates have historically preceded annual sales growth of 20pc to 40pc, according to CICC. The loosening in property policy is unlikely to be reversed before the economy stabilizes, the bank said in a report Oct. 25.
China Vanke, the country's biggest listed developer, jumped as much as 7.5pc in Hong Kong trading and traded 1.7pc higher at HK$18.42 as of 10:19 a.m. local time. Shui On Land rose 2.8pc. A gauge tracking Shanghai-listed homebuilders fell 0.1pc.
China on September 30 cut the mortgage down-payment requirement for first-time buyers in lower-tiered cities by 5pcage points to 25pc. The move followed a host of other easing measures. This year, the government also cut the down payment for first-time homebuyers borrowing from local housing providence funds to 20pc, allowed developers to finance a bigger part of projects with borrowed money rather than their own capital, and eased restrictions on property purchases by foreigners. In March, it lowered the deposit for some second homes to 40pc from 60pc and exempted select homeowners from a home sales tax.
Policies will likely need to be loosed further to help ease a widespread supply glut before developers have the incentives to boost spending on land and new construction, according to Mizuho Securities Asia analyst Alan Jin.
The construction boom since 2013 has led to a 13pc increase in unsold homes in the year ended September 30.
China's urban dwellers already own about 24 square meters of housing per capita, and the stockpile of new homes being built suggests that another 7 square meters could be added, bringing the average home ownership to 31 square meters, according to Nomura's chief China economist Zhao Yang. That's "very high" given China's current level of economic development, and compares with 35 square meters per capita in Japan and 54 in the US, he said.
"What the government can do is try to prevent too sharp a decline in property investment," Zhao said by phone from Hong Kong. "That's the pragmatic target." Stimulating the property market to revive economic growth, "frankly speaking, won't be a big help."
For property to be able to underpin economic growth, the Chinese government will have to further cut rates and reduce transaction taxes, as the effects of previous loosening measures are abating, Ning Jingbian, a Beijing-based analyst at CICC, said in an interview before Friday's announcement of the rate cut.
China's economy grew 6.9pc in the third quarter of this year, the slowest quarterly expansion since 2009, the government said last week. The growth in fixed-asset investment slid to 10.3pc in the first nine months, the lowest since 2000.
Still, a 15pc year-on-year increase in new property starts in September prompted some optimism about the investment outlook. The expansion, which reversed 10 months of declines, "suggests that some developers are turning positive on the sales outlook" for the next 12 to 18 months, Barclays Plc analysts led by Hong Kong-based Alvin Wong wrote in an October 19 report.
China's aggressive easing measures are yielding other promising signs.
Property agent Yue Lu noted an unexpected surge in potential buyers at two projects she was selling in the southwestern Chinese city of Chongqing during the National Day holiday early this month, after the latest cuts to mortgage down payments.
"We were expecting few visitors, thinking people would be traveling," Yue, a local manager with Shenzhen World Union Properties Consultancy., said by phone from Chongqing. Almost 300 visitors came in the first two days of the week-long holiday, when Chinese travel en masse, triple what she sees during a normal weekend, Yue said. "People were excited as they can now buy a home." (Bloomberg)