Developers expected to slash house prices to ease housing inventory oversupply

An increase in the mainland's home inventory in the first half could lead to price cuts of 15 per cent or more in the next six months, say industry analysts.

Many developers have already announced 10 to 20 per cent increases in contracted sales for this year after a stellar performance last year, but found conditions tough in the second quarter.

"For the market to recover, developers would have to cut prices and credit policy would need to be relaxed," said Liu Wenchun, head of research at property consultancy Worldunion in Shenzhen.

She said she saw signs of banks speeding up mortgage approvals and the possibility of developers cutting prices by more than 15 per cent in the second half, from less than 10 per cent in the first.

According to Liu, it has been taking longer to sell mounting property stock in recent months as sales slow. The average destocking period in the top 10 cities monitored by Worldunion stood at 17.8 months at the end of May. The previous peak was during the 2011-2012 downturn, when the average hit 18.4 months.

The destocking period was 11 months in the four first-tier cities Guangzhou, Shenzhen, Beijing and Shanghai at the end of May - 53 per cent longer than that a year earlier, consultancy E-House (China) said. It was up 40 per cent to 12.7 months in second-tier cities, mainly provincial capitals. In the eastern port city of Qingdao, it now takes as long as 35.8 months to clear inventory.

The situation is expected to worsen. New home sales in 40 cities monitored by Centaline China contracted by 17 per cent last month to the second-lowest level this year.

"Although banks have been accelerating releasing loans, the interest rate is still priced at a premium against the benchmark for mortgage loans," Centaline China said. "There is no support for a market recovery in the short term."

Sluggish sales will force developers to cut prices further to entice homebuyers , or risk punishment by investors. They have already cut land purchase expenses and slowed new projects to ease the cash crunch.

Global ratings agency Standard & Poor's last week lowered its long-term corporate credit rating on Zhong An Real Estate to B- from B, citing weakening cash flow over the next 12 months due to worsening operating conditions, particularly in its biggest market Hangzhou where increasing oversupply is expected to provoke a price war among developers.

The agency has also reduced another mainland developer, China Properties Group, to "negative outlook" from "stable" as it expects the company's contracted sales to be insufficient to cover its interest expenses over the next 6 to 12 months.

Many developers failed to secure 40 per cent of this year's sales target in the first five months. Country Garden, for example, hit 39 per cent while China Resources Land fell far short at 28 per cent. At the same time, policies may also become favourable in the second half.

"As for property policy, the worst is over," said Liu.

She said home purchase restrictions would probably remain in the first-tier cities , but other cities may follow the example of Hohhot, capital of Inner Mongolia, which scrapped the curbs this week.

Policymakers have been gradually easing credit policies in the past few months to rev up the economy. On Monday, the China Banking Regulatory Commission announced changes in the loan-deposit ratio, potentially freeing up hundreds of billions of yuan to be pumped into the economy.

"We expect to see sales recovery getting stronger during the third quarter and to peak in September and October," Edison Bian, research head of China property at UOB Kay Hian, said in a note on Monday.