Price cuts may deepen after weak holiday sales of new homes

Disappointed by poor sales during the May Day holiday, mainland developers are expected to deepen their price cuts in a bid to reverse market sentiment as there is no sign of any relaxation in mortgage policies.

Home sales in Beijing dived 80 per cent from a year earlier during the May 1-3 holiday to a seven-year low, according to data from consultancy Centaline.

Only 169 new homes were sold in this year's break, in sharp contrast to more than 1,000 during the same period in the market's heyday and more than 400 even in the 2008 holiday during the global financial crisis.

Sales this year were much worse than developers had expected. In March, most had attributed slowing sales in the preceding two months to bad weather. They said February's price cuts at some Hangzhou projects would not affect markets elsewhere.

However, a much anticipated golden March and silver April for sales never materialised.

Centaline's data showed new home transactions in 54 major cities almost halved in the first three days of May from a year earlier. Second-tier cities, mostly provincial capitals such as Hangzhou and Nanjing, were the hardest hit.

"We will see more price cuts in May and June as developers, particularly those which are aiming for 60 to 70 per cent of annual sales in the first half, are facing considerable pressure," said Lu Qilin, the head of research at consultancy Shanghai Deovolente Realty.

Data from his research team showed a four-day property fair in Shanghai, which ended on Saturday, failed to revive sliding sales as daily transaction volume in the city fell to 16,200 square metres during the event from last month's 25,400 square metres.

Despite the record number of visitors, developers failed to lock in deals, as price discounts were felt not attractive enough.

Ma Wenshuai, the marketing director of property consultancy WorldUnion, said soaring land prices were compressing developers' profitability and making it hard for them to reduce prices.

China Vanke, the mainland's largest developer by sales, made media headlines last week with its first drop in net profit in more than a decade of 5 per cent in the first quarter.

"Sales were good during the May Day holiday. We booked sales worth over 300 million yuan (HK$373 million) in the three days [in Guangzhou], achieving the company's target," Vanke said.

The developer, which already had eight projects for sale in the city, did not launch new projects during the holiday.

For homebuyers, rising mortgage costs are adding to the burden of record high prices.

In Guangzhou, most banks charge first-time homebuyers 5 to 10 per cent more than the benchmark interest rates, loan officers at a China Overseas Land & Investment project said. A year ago, discounts of up to 15 per cent were given.

The city announced last month it would toughen rules for loans from the local housing provident fund, which offers lower interest rates than commercial banks. Homebuyers will have to make monthly contributions to the fund for two years before they can borrow from it.

"Although some cities recently took material steps to loosen property controls, there is no sign of relaxation in the more important credit policy," Centaline said. "Only further price cuts can likely break the current wait-and-see sentiment."

Regulatory officials last week warned against credit risk in property loans and urged banks to exercise caution in lending to developers.