Here are five things to look forward to next year in China’s residential property industry
- While sales of auto and home appliances are slowing, policymakers are not expected to ease property curbs because they are waiting for the final signal that investment growth has decelerated, analysts said
Will Beijing ease its curbs on the property market, as the all-important economic engine is widely expected to slow down?
That was the biggest question for China property watchers awaiting signals from this week’s Central Economic Work Conference, which sets economic policy direction for the world’s second-largest economy for the coming year.
Property industry watchers will scrutinise the post-conference pronouncements word-by-word for hints about what’s ahead for soaring home prices and other policies impacting the sector.
The meeting came at a high-stakes moment for China and its property market. The Chinese economy is slowing at a time of uncertainty about the US-China trade war.
Protests, rare in China, have been sparked after developers cut prices in new-flat developments, undermining the value of homes that had recently been bought. Meanwhile, government curbs to control runaway home prices have become a drag on the economy, at a time when President Xi Jinping said the country needs a powerful domestic market to drive growth.
“Property policy easing is actually the most important anchor in our view of a China softer landing in 2019. We are currently seeing the property sales already stabilising at very low levels,” Bank of America-Merrul Lynch’s chief Greater China economist Helen Qiao said.
While the sales of auto and home appliances are already slowing down, policymakers are not expected to ease property curbs because they are waiting for the final signal that property investment growth has decelerated, she said.
“We expect property investment growth to slow down in the fourth quarter and in the first quarter of next year, which would trigger more policy easing in the property space,” Qiao said.
Here are five key things property watchers want to know, and will be listening for signals about at the meeting, that will impact China’s property market next year.
- Will the government ease the financing restrictions for developers?
Credit control, a crucial facet of Chinese government’s property curbs, swings between the tight and loose according to policy directive: after easy credit drove a boom market in 2016, onshore bond market was the first to close the door for developers in October 2016, marking the beginning of the current policy tightening cycle.
Even as bonds resumed since late 2017, issuance remains a case-by-case basis that favours large and financial healthy developers.
According to Wind data, total interest-bearing liability of A-share developers grew to 2.9 trillion yuan (US$420 billion) by mid-2018, while their net gearing ratio has climbed to 131 per cent from 120 per cent by the end of 2016. They also face big maturity pressure, as US$34.8 billion of onshore bonds and US$17.9 billion of offshore issues will mature or become puttable in the next 12 months, according to Moody’s.
- Will price caps in big cities be loosened?
Since 2016 Beijing became the first Chinese city to cap prices on new flats, more than 20 first and second-tier cities have followed, refusing to give pre-sale permits to developers. Developers could not buy land through auction without agreeing on future selling prices. This has led to prices being “pretty badly distorted”, in many case even cheaper than surrounding old flats, according to Nicole Wong, regional head of property research at CLSA.
But after sale in big cities significantly slowed since August, developers cut prices in some projects amid growing inventory, local authorities turned instead to barring developers from cutting prices.
- Will purchase restrictions on smaller cities be eased?
Around 52 Chinese cities have restricted home purchases, according to Moody’s. Buyers have to pay three years of social security fund locally to qualify for buying just one flat, while buyers with local hukou (household registration) can buy no more than two. This has effectively tamed the local demand while keeping outside speculator at bay.
Eligibility restrictions are the easiest to unshackle, said Ouyang of Seazen. It is at local governments’ discretion to make it easier for immigrants to gain local hukou, or lower the social security payment requirements, without annoying Beijing.
- Will shantytown redevelopment taper off in small cities?
Initiated in 2008, China’s government has poured hundreds of billions of yuan into redeveloping shantytowns to improve the lives of low-income families. The redevelopment accounted for an estimated 20 per cent of the volume of homes sold last year in China, according to JPMorgan’s data. Any slowdown of the programme, first revealed in mid-2018, may reduce sales in third- and fourth-tier cities by 10 per cent, according to GF Securities. Industry watchers will closely monitor how the programme may be trimmed, and whether any fine-tuning will be made to cushion the impact on the industry.
- Will the “pre-sale” model be phased out?
Presales, which allows builders to sell homes off the plan, had been a cornerstone of Chinese developers’ “high leverage, high turnover” strategy for years.
The government began to review the practice in September. The possible ban caused panic among developers, raising concern that their cash flow would be crimped at a time when bank loans are also drying up. Most developers rely on presales revenue to make up half of their funding, and the reliance is particularly severe for small developers. That has a knock-on effect on local government finance, as developers cut their budgets for land, a main revenue contributor for many local authorities.