Housing 'correction' threatens broader mainland economy

Slower property investment as a result of credit tightening, oversupply and sliding prices could pose a serious threat to the mainland's economic growth.

Industry observers believe the situation will increase pressure on the central government to relax its housing policy in order to avoid a meltdown in the sector.

"Gross domestic product [growth] may dip below the 7 per cent mark if the current trend in new housing starts continues for the rest of the year," said Alan Jin, an analyst at Mizuho Securities.

Real estate investment grew 16.8 per cent year on year in the first quarter, compared with a 19.3 per cent growth in the January-February period, according to data released by the National Bureau of Statistics last month.

New home starts fell 21.9 per cent year on year in March, after a 27.4 per cent decline in January-February.

Property investment, including residential, commercial and public housing, contributes about 16 per cent of the mainland's GDP.

Residential property constitutes the major chunk of the real estate sector, Jin said. "Its slowdown would affect real estate investment as well as related up- and downstream sectors."

In the first quarter, nationwide property sales fell 5.2 per cent year on year in value and 3.8 per cent in terms of volume after a 13.7 per cent and 7.7 per cent rise in the last quarter of 2013.

Major developers have taken a hit in the first quarter as property sales dropped. Last week, China Overseas Land & Investment said accumulated contracted property sales in the quarter dropped 12.38 per cent to HK$45.56 billion, from HK$52 billion a year ago.

"The mainland property market is experiencing a correction. It is restructuring and will force small and uncompetitive developers out of the market," said Andy Chang, associate director at Fitch Ratings.

Chang attributed the market correction to the credit tightening. "The increasingly difficulties in raising funds will force small and local developers to discount housing prices," he said.

With developers locked in a price war, he said, potential buyers would prefer to wait for prices to drop further before entering the market. "No one really wants to buy now."

Property investment follows cycles lasting more than a year, and leading indicators strongly suggest that a downturn has started, according to Nomura. It says four out of the mainland's 26 provinces - Jilin, Heilongjiang, Gansu and Inner Mongolia - experienced negative year-on-year growth in property investment in the first quarter.

"The last time a similar decline took place was in the last quarter of 2008 at the outbreak of the global financial crisis," it said in a recent report.

Jin believes the central leadership would relax housing policy only as a last resort. "Local governments would move well before central government's intervention," he said.

"Investors will stay away from the mainland residential sector," said Alvin Yip, managing director of investment and advisory services at DTZ, adding that the outlook for the office and retail market remained positive.

For the first quarter, he said, the total value of en-bloc transactions, in which entire buildings change hands, amounted to 15.9 billion yuan (HK$20 billion), up from 10 billion yuan a year ago.