Happy days may soon be over for China’s real estate companies

Boom times seem to be winding down for real estate companies with more cities set to tighten house purchase rules, a new report said.

The warning comes in a report published by Bank of America Merrill Lynch after two second-tier cities in southeast China issued fresh rules to curb home purchases.

The Nanjing government said on August 11 that it would hike the down payment requirements from 30-40 per cent of the property value to 35 -50 per cent, while the Suzhou government said it would restart its Home Purchase Restriction programme along with tighter rules for land auctions. Both the cities are second-tier cities in Jiangsu province and have seen unprecedented rise in property prices of over 20 per cent in the first six months of this year.

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The two cities are the latest examples of local governments tightening local housing policies in recent months, analysts said.

“The move is in line with the central government’s desire to rein in the sector,” said David Cui, Tracy Tian and Katherine Tai, authors of the Bank of America Merrill Lynch report.

“Looking at the latest data, we believe that the momentum in the housing market has turned south again and this should put pressure on demand for commodities and the yuan in the next few quarters,” it said.

Credit ratings agency Moody’s said in a recent note that further policy tightening is likely in cities where housing price growth has been strong, and this in turn would crimp demand and slow price growth.

The Nanjing and Suzhou moves are in line with the speech made by a “person of authority”– in this case a front-page interview in People’s Daily in early May — that the housing market should not be used to bail out short term economic growth.

The analysts said that the two main drivers of housing demand, policy and liquidity, are taking a back seat and this will hurt margins for developers.

Though China’s housing policy has turned since the “person of authority” speech, the market had lost most of its traction much before that, they said.

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“It’s our impression that, between mid-2015 and February 2016, the government tried hard to reflate housing demand. However, compared to the previous two rounds in 2008-09 and 2012, it took the government much more strenuous efforts to get the market going as the impact has been moderate,” they said.

Overall results have remained mediocre. Housing inventories in China, or unsold residential property declined by just 5 per cent on a yearly basis in July and remained high at 432 million square metres. Real estate investment growth, another major indicator, declined by 5 per cent July, compared with a 7 per cent growth in April this year.

Ironically, the government’s pro-housing policies have caused huge money flows into top-tier cities like Shanghai and Shenzhen, generating social tension, adding cost pressure for business and making the financial system more vulnerable to potential shocks. Meanwhile, housing markets in low-tier cities – where the government expected to de-stock the inventory – has refused to budge.

Such phenomenon has forced the government to tighten policies to avoid a bubble situation, the report said. On the other hand, the strong growth in money and credit has started showing signs of slowing down—indicating the tightening of liquidity.

China’s banks issued 464 billion yuan worth of new loans in July, far less than the market forecast of 800 billion yuan, according to a Bloomberg poll, even though they mainly include mortgages loans.

“[The tightening liquidity would] potentially take more wind out of the house market’s sails,” the report said.

However, some mainland brokerages remained positive on the prospects for the domestic property market.

“We do not believe that the expectations of gradual policy tightening would pose a threat to the fundamentals of the real estate industry. As such, we remain upbeat on the performance of property stocks over the long-term and recommend investors to keep a close tab on the sector,” Citic Securities said in a research note.