China’s property sector recovery loses steam after home prices face strong headwinds, investments decline

New-home prices in Beijing, Shanghai and other tier-one cities rose 0.1 per cent month on month in May, slowing from April’s 0.4 per cent gain
Lived-in home prices in tier-one cities declined 0.4 per cent in May, reversing from a 0.2 per cent gain posted a month earlier

China property

Elise Makin Beijing

Published: 5:00pm, 15 Jun, 2023

Why you can trust SCMP

Recovery in China’s property sector continued to lose steam as almost all metrics showed a decline in May, which some analysts blamed on weak confidence, population movements and potential oversupply problems.

New-home prices in Beijing, Shanghai and other tier-one cities rose 0.1 per cent month on month in May, slowing from a 0.4 per cent month-on-month gain in April, according to data released by the National Bureau of Statistics (NBS) on Thursday.

Prices for new homes in tier-two cities rose 0.2 per cent, also slower than April’s 0.4 per cent increase. Tier-three cities’ property prices were flat in May after growing 0.2 per cent in the previous month.

As for lived-in home prices, tier-one cities saw a 0.4 per cent decline in May, reversing from a 0.2 per cent gain posted a month earlier. Tier-two and tier-three cities registered 0.3 per cent and 0.2 per cent declines, respectively.

Among 70 medium and large cities in mainland China tracked by the NBS, only 46 cities recorded an increase in new home prices, down from 62 in April. The lived-in home market performed worse, with only 15 cities seeing rising prices, down from 36 in the previous month.

Builders remained cautious about expanding. Investment in the property sector is on a downward trajectory this year, with the year-on-year decline in the first five months of the year at 7.2 per cent year, extending the 6.2 per cent fall recorded in the January to April period. Residential investment dropped 6.4 per cent year on year in the first five months, which was worse than the 4.9 per cent decline in the first four months.

Pimco says China property needs broader policy support for meaningful recovery

Developers prioritised completing existing projects over launching new ones. New home construction shrank 22.7 per cent by floor area, while completed construction rose 19 per cent.

“From what we see from the May data, the property market is generally stable, but it is still affected by multiple factors,” Fu Linghui, a spokesman for the National Bureau of Statistics, said on Thursday. “Investment in real estate remains sluggish and the market recovery is slowing.”

“Although the market is still recovering, we can see that it is currently facing many difficulties. With economic recovery and policies to stabilise the property market coming into play, market expectations are improving, and the property market is expected to gradually stabilise.”

Analysts point to a range of factors for this slowdown.

“We believe the property markets in lower-tier cities still face strong headwinds from weaker growth fundamentals than top-tier cities, including net population outflows and potential oversupply problems,” said analysts from Goldman Sachs in a Thursday note.

“Growth of household medium-to-long term loans, which are mostly mortgages, remained weak in May, in line with slower property transactions,” they said.

As the month-on-month increase in home prices has narrowed for two consecutive months, the first quarter’s recovery has not been sustained, said Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institute.

“Current easing policies will need to stay in place, and there needs to be a new round of stimulus policies,” he said.

Last year, Beijing stepped in to support the nation’s struggling developers, firing “three arrows” – bank credit, bond issuance and equity financing – to help resuscitate the ailing sector that had weighed down China’s overall gross domestic product (GDP).

Recovery remains elusive due to weak homebuyer confidence, said Lu Qilin, director of 58 Anjuke Real Estate Research Institute. “In the near term, we may see another market bottom. There needs to be support for both the supply and demand sides.”

He added that current demand has shifted to improved housing, which accounted for over 60 per cent of the demand in key cities. Easing policies will need to be promoted in these cities, he urged, echoing his peers’ view.

May data also showed weakened sales. Property sales grew 8.4 per cent to 4.98 trillion yuan (US$695.8 billion) during the first five months, slowing from the 8.8 per cent increase recorded in the first four months. Home sales rose 11.9 per cent through May, up 0.1 percentage points from the previous month’s reading.

Developers’ financial position deteriorated. During the first five months, developers had 5.6 trillion yuan in capital, down 6.6 per cent compared with the same period last year and showing a decline for the first time this year.

“We see persistent weaknesses in the property sector, mainly related to lower-tier cities and private developer financing, and believe there appears to be no quick fix for them,” Goldman Sachs’ analysts led by Lisheng Wang wrote in a Sunday report.

But they expect more easing measures ahead to counteract still-strong growth headwinds and lingering financial risks, referring to steps such as further reduction in the down-payment ratio and a relaxation of home purchase restrictions in top-tier cities.

“We believe the policy priority is to manage the multi-year slowdown rather than to engineer an upcycle, as such, we only assume an ‘L-shaped’ recovery in the property sector in the coming years.”