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27-10-2015, 09:39 PM
- Oct 27 2015 at 2:40 PM
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[img=620x0]http://www.afr.com/content/dam/images/g/k/j/j/6/5/image.related.afrArticleLead.620x350.gkjddw.png/1445917248816.jpg[/img]Reviving investment in real estate is crucial for the Chinese government. China Photos
by Bloomberg News
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, of 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 large cities monitored by the government. It was the first such rise in 17 months. Yet a construction boom over the past two years has led to 424.7 million square metres of unsold homes languishing nationwide at aSeptember 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. In September China cut the deposit first-time home buyers in smaller cities need to put down and was targeting oversupply-plagued cities that accounted for about 85 per cent of sales nationwide, China International Capital Corp said.
INVESTMENT SLOWDOWN
"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 Co 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 contributed almost 30 per cent of gross domestic product, Nomura Holdings Inc said.
Authorities are seeking to bolster an economy that is forecast to grow at the slowest annual rate in 25 years, as drivers of growth such as construction and manufacturing have stumbled. China cut the one-year lending rate to 4.35 per cent from 4.6 per cent effective on Saturday, while the one-year deposit rate will fall to 1.5 per cent from 1.75 per cent. 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 dropped below inflation at 1.6 per cent in September, property sales might beat expectations in the fourth quarter as negative interest rates had historically preceded annual sales growth of 20 per cent to 40 per cent, CICC said. The loosening in property policy was unlikely to be reversed before the economy stabilised, the bank said in a report on October 25.
On September 30 China cut the mortgage down-payment requirement for first-time buyers in lower-tiered cities by 5 percentage points to 25 per cent. The move followed a host of other easing measures. In 2015, the government also cut the down payment for first-time home buyers borrowing from local housing providence funds to 20 per cent, 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 40 per cent from 60 per cent and exempted select home owners from a home sales tax.
Policies would probably need to be loosened further to help ease a widespread supply glut before developers had the incentives to boost spending on land and new construction, Mizuho Securities Asia Ltd analyst Alan Jin said. The construction boom since 2013 has led to a 13 per cent increase in unsold homes in the year ended September 30.
China's urban dwellers already own about 24 square metres of housing per capita, and the stockpile of new homes being built suggests that another seven square metres could be added, bringing the average home ownership to 31 square metres, Nomura's chief China economist Zhao Yang said. That was "very high" given China's current level of economic development, and compared with 35 square metres per capita in Japan and 54 in the US, he said.??
'PRAGMATIC TARGET'
"What the government can do is try to prevent too sharp a decline in property investment," Mr Zhao said. "That's the pragmatic target." Stimulating the property market to revive economic growth "frankly speaking, won't be a big help", he said.
For property to be able to underpin economic growth, the Chinese government would have to further cut rates and reduce transaction taxes, because the effects of previous loosening measures were abating, Ning Jingbian, a Beijing-based analyst at CICC, said before Friday's announcement of the rate cut.
China's economy expanded 6.9 per cent in the third quarter of 2015, the slowest quarterly expansion since 2009, the government said last week. The growth in fixed-asset investment slid to 10.3 per cent in the first nine months, the lowest since 2000.
Still, a 15 per cent 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.
PROMISING SIGNS
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 south-western Chinese city of Chongqing during the National Day holiday early in October, after the latest cuts to mortgage down payments.
"We were expecting few visitors, thinking people would be travelling," Yue, a manager with Shenzhen World Union Properties Consultancy Inc, said. Almost 300 visitors came in the first two days of the week-long holiday, when Chinese travel en masse, triple what Ms Yue gets during a normal weekend. "People were excited as they can now buy a home."
Bloomberg
With assistance from Emma Dong in Shanghai
Bloomberg