Home price cuts unlikely to affect averages in China's big cities

Will home price cuts spread to the mainland's first-tier cities this year?

Yes they will, but they are unlikely to weigh down the average price in each city, because of tight supply and strong demand, analysts and developers said.

The market is still trying to figure out why China Vanke, the country's largest home builder by sales revenue, started to sell unfurnished flats at a brand new Beijing project on March 16 at lower-than-expected prices.

It goes against the company's long-standing strategy to build fully furnished homes, which often pushes up asking prices.

The move has been taken as the first evidence that price cuts initiated in Hangzhou in Zhejiang province, a second-tier city, last month are spreading to first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen.

However, Huang Yu, deputy head of the China Index Academy, the country's biggest real estate research and data provider, said: "Home prices in tier-1 cities will continue to rise this year."

Her view was echoed by many mainland developers who came to Hong Kong in recent weeks to address the media and investors after reporting annual results.

"Short supply will drive up prices slightly in tier-1 cities and drive down transactions this year," said Li Ming, president and chief executive of Beijing-headquartered Sino-Ocean Land.

Li said he would keep investing in these cities but cut prices in other cities or even sell entire projects there to speed up sales.

Until last month, home prices in the tier-1 cities were still rising at a double-digit percentage rate in year-on-year terms, although slower than last year's pace of over 20 per cent.

For example, Shanghai led home price gains with a year-on-year increase of 18.7 per cent last month, according to National Bureau of Statistics data. Home prices in these cities last fell in year-on-year terms in autumn 2012.

In month-on-month terms, home price gains in the four cities have also been slowing since local officials announced fresh tightening measures, such as higher down payments and restrictions on non-local residents.

Data from China Real Estate Information Corp, a real estate data provider and website operator, showed the stock of unsold homes at the end of last month in Beijing would take four months to be fully absorbed, an indication of short supply.

That compared with a destocking period of 15 months for Hangzhou, which is considered an oversupplied market.

"As the market has yet to recover from the traditional slack season, it is normal for some firms to cut prices in the first half of March," CRIC said. "A price cut that accelerates sales will not trigger a turnaround of the market."

Beijing media reported that the newly launched units in Vanke's Orange City project were all sold on the first day and buyers welcomed the average price of 21,680 yuan (HK$27,343) per square metre, instead of the 25,000 yuan per square metre they had expected.

This is the final instalment in a three-part series on mainland property market trends