Behind Chinese Property Rebound

Chinese Housing Market Going up With the arriving of so-called“Golden September and Silver October”， Chinas real estate market， an essential engine of growth for the countrys economy， seems to have bounced back from a year-long decline.

According to the data released by the National Bureau of Statistics （NBS） on September 18， 35 out of the 70 large- and medium-sized cities surveyed saw new home prices climb on a monthly basis in August， up from 31 in July， with 26 reporting month-on-month price declines， down from Julys 29.

On an annual basis， 62 cities reported new home price drops in August， down from Julys 67， with Shenzhen posting a sharp rise of 31.8% in new home prices. Average new home prices of the 70 cities grew 1.7% year on year compared with a decline of 0.4% in July， marking growth for the first time in the past 11 months.

For existing homes， 16 cities saw price declines in August on a monthly basis， 11 reported flat prices， while 43 cities posted gains.

According to Liu Jianwei， statistician at the NBS， the number of cities with price increases in both new houses and second-hand houses grew in August on a monthly basis but with a smaller margin due to a narrowing rise in first-tier cities.

Home prices in top-tier cities， such as Beijing， Shanghai， Guangzhou and Shenzhen saw strong growth year on year due to high demand， leading the upturn in the house market， while in second-tier cities， both new and existing home prices recorded mixed performances. In third-tier cities， home prices continued to decline.

Housing sales also show the market is coming out of its funk. In the first eight months of 2015， housing sales rose 8% to 616，494 square meters， and in August alone they rose 15.3% from a year earlier.

It is well known that the housing sector in China went through a tough time in 2014， due to weak demand and a surplus of unsold homes. The cooling has continued into 2015， with both sales and prices falling and investment slowing. Why the market suddenly picks up？

One often-cited reason for the upturn in the house market is that investors are switching from equities to housing as Chinas stock market bubble deflates. However， a FT Confidential Research survey conducted in August proves it untenable.

The survey shows that 17% of consumers surveyed said they planned to invest in real estate in coming months， and only 20% of them thought that now was a good time to buy a house for investment purposes. 41% of consumers said they planned to buy stocks.

Experts express their worries about the unex- pected recovery in the housing market， saying it due to the governments efforts to bail out the housing market， which interrupt the markets cyclical adjustment.

Zhang Sisi， associate professor of the School of Economics at Shanghai University of Finance and Economics and director of the Center for Real Estate and Housing Research at Institute for Advanced Research， said： “The recent rebound in housing market is boosted by aggressive government policies， which is not sustainable for the long run. The government should seek the new profit points for the real estate sector， such as industry innovations and service innovations， to encourage the further development of the market.”

Policy Incentives

Since the second half of last year， the central government has been rolling out a slew of favorable policies to boost the housing market， such as the easing of down payment requirements for secondhome purchases and the removal of the restrictions on home purchases by foreigners. Some local governments also have rolled back their restrictions on home purchases.

By far， the Peoples Bank of China （PBoC）， the countrys central bank， has cut benchmark interest rates four times and lowered banks reserve requirement ratio three times since February， in a move to combat the slowdown in the housing market， which is the major driver for the worlds second-largest economy.

According to Xia Dan， a senior researcher of the Bank of Communications， Chinas property investment continued to slow despite rising home prices， which is considered as fresh evidence of cautious attitudes from builders and the headwinds facing the industry.

Those efforts greatly boosted the house demand. Many property developers were cheered when new economic data showing housing sales are continuing to rise.However， other numbers suggest the cheering may be premature.

The improving sales have not been companied by a revival of real estate investments， which expanded just 3.5% in the first eight months on an annual basis， the slowest pace since 2000， according to the NBS.

Over the period， new housing construction stood at 817.3 million square meters plunging 16.8% from a year earlier， and the volume of land sales by local government to property developers across the country fell 32.1% to 141.1 million square meters， NBS data showed. In August alone， land transaction volume was down 32% from a year earlier.

The countrys leading residential-property developer China Vanke Co， whose earnings are seen as a barometer for Chinas major developers， posted slower net profit growth during the first half of the year compared with gains in the same period last year.

Net profit edged up 0.77% to 4.85 billion yuan in the first six month of this year， a sharp drop from the 5.6% expansion in the first half of 2014. Though the developer sold more homes during the first six months， it is still struggling to maintain profit margins， according to the companys earnings report.

In addition， the recovery of the housing market in small cities is weighed down by high inventories， said Zhang Dawei， chief analyst at Centaline Property.

While home sales and prices have improved in bigger cities in recent months after government support measures， an excess of unsold houses in small cities still keeps the housing market under pressure， said Zhang.

Call for Innovations

For decades， private demand from the housing market and manufacturing exports have been the main growth engines of the worlds second largest economy.

Currently， though policymakers are stepping up efforts to restructure the economy to make it less reliant on investment and more on domestic consumption， the housing market remains a major driver of Chinas growth. A sluggish property market is one reason why Chinas economic growth， which has been already targeted by the government to come in at its lowest level in 25 years， could end up lower still.

Indeed， all eyes are now on Chinas policy response and its ability to reinvigorate an economic upturn. The current policy doesnt address the real problem—the lack of private sector demand that has been the economys most dynamic growth driver for years.

On private demand， although an economic lift from exports may be not imminent， it is generally believed that a recovery in housing demand will eventually drive construction activity， should the current market consolidation proceed smoothly.

Once they slow， the downward spiral is significant， as seen in Chinas current economic downturn. At this juncture， there is no light at the end of the tunnel in the current export down-cycle， given continued sluggish demand globally outside the US as well as the absence of a new export product cycle.

The housing market has genuinely been going through a market-based correction， with sales rebounding from a previous slump， an inventory correction underway and developers not rushing to kick start new projects too early in the cycle. Of course， this recovery is still at an early stage. It remains to be seen whether stronger sales in major cities， such as Beijing， Shanghai and Shenzhen， will spill over into smaller cities， or whether liquidity provision will remain sufficient for housing purchases and developers investment appetite wont be affected by a worsening economic environment or political uncertainty.

This potential rebound in the housing sector obviously wont be enough to trigger a full-fledged economic recovery. However， a recovery in this sector might provide a more efficient boost to Chinas economic growth than all the government-induced investment projects.

Given that the current recovery is boosted by the governments excessive bailout measures， which is unsustainable for a long run， experts now calls for less government interventions and more innovations in the housing market.