As China's stimulation measures take effect, data suggest the price reductions, mortgage policies, and interest rates cuts are luring homebuyers back
Industry data seem to suggest that the first round of government measures aimed at reviving China's ailing property sector, including the deep cuts in interest rates, are having an impact. The Shanghai city government has reported that the nunber of new homes sold in November was 47% higher than the number sold in September and 36% higher than in October. Sales of existing homes in Shanghai were up 68% in November compared to the previous month. In Chongqing, sales volumes reached 1.38 million square meters in October and 1.1 million sqm in November, up from less than 1 million sqm in September.
"In recent weeks, there have been signs that property price reductions, aggressive interest rate cuts and preferential mortgage policies are beginning to lure buyers back in some key markets," says Jing Ulrich, head of China equities at J.P. Morgan, in a recent report.
Rong Ren, chief executive officer of Harvest Capital Partners, a private equity firm focusing on the property sector in China, also remains confident about the sector's long-term future. "The fundamentals are strong," he says.
Ren suggests that the immediate focus should not be on the countless masses moving into the cities, but on those who are already there. The reason is that the initial concerns of migrants after moving to a city are getting a job and putting their children through school. Buying a house follows after they have settled down. So, while migrant demand will be a major force driving property demand, Ren expects that to happen about seven to 10 years down the line. The present demand is driven by people already in the cities who are upgrading their current housing.
The real estate market will pick up as early at the third or fourth quarter next year, Ren reckons.
The upturn will depend on affordability, which is something that government policy has done a lot to address already. A recent note by Citi says that borrowing costs for first-time buyers have come down to around 4.3% following the latest interest rate cut from 6.6% at the beginning of the year. The reduced cost of borrowing, combined with a drop in price expectations among sellers, has made housing more affordable.
The metric that the upturn will be measured by will be sales volume rather than price. Citi expects house prices to drop by around 20% to 25% by the end of 2009, which means developers will have to focus on volume to make money.
"Developers that have acquired landbanks in prime urban areas with cheaper land costs in the past should be able to play the volume game better as their lower land costs should allow them to price their new launches with more flexibility, and yet they could achieve a reasonable margin," says the report.
The other major development in the property sphere in China is the introduction of Reits, which the government announced will be launched in the near future. Although details are sketchy, there has already been some speculation over how much impact these instruments will have. For now, it is widely expected that they will not have much impact on the residential sector.
"The Reit is likely to be more popular for office, commercial and industrial properties than residential properties, given the relatively higher yields of the former in China," says Hingyin Lee, director of research and advisory at Colliers in Shanghai.
Given how critical China's property sector is for the country's economy, there have been recent fears that a slowdown in this sector could have a similar cascading effect across the economy as it has had in the US. But that now seems like an extreme viewpoint. Through a combination of stimulus measures and the relaxation of legislation, the government seems determined to ensure the sector continues to perform.