China Home Prices to Fall 5% on Supply Pressures, S&P Forecasts

China home prices will fall this year as developers cut prices to meet sales targets amid a cooling property market, Standard & Poor’s said.

Home prices will fall 5 percent this year compared with an 11.5 percent gain in 2013, the New York-based ratings company said in an e-mailed report today. Sales volume will improve in the second half of the year and rise 10 percent for the full year, boosted by price cuts, according to the report.

“Prices are likely to continue to slide because of large inventory in some markets,” Hong Kong-based analysts, led by Bei Fu, wrote in the report. “Many small unrated developers will feel the heat the most because their sales and financing capacities are substantially weaker than their larger peers’. Some lower-tier cities with limited demand and abundant supply could see deeper downward price adjustments.”

The pressure on Chinese developers was underscored by the collapse of a builder in a city south of Shanghai in March. After four years of government restrictions to cool the housing market, home sales and property construction are sliding and have become a drag on the economy, which recorded its slowest growth in six quarters in the first three months of the year.

Home prices fell 0.3 percent in May from April, the first monthly drop since June 2012, according to SouFun Holdings Ltd., China’s biggest real estate website owner.

Developers set a target 20 percent higher than their average 2013 sales and achieved only 27 percent of it in the first four months, according to S&P, which tracks 27 developers.

“We expect most large national players to be able to weather the market correction ahead,” Fu said. “Among the rated developers, companies with more aggressive debt-funded growth appetite or weak execution ability will face downgrade risks.”

Moody’s Investors Service revised its credit outlook for Chinese developers to negative from stable last month.

— With assistance by Bonnie Cao

Before it's here, it's on the Bloomberg Terminal.