China’s cities taking steps to pare record housing inventories

Starting from mid-February till the end of this year, home buyers in China’s third-tier city of Shaoxing in Zhejiang province will be given a tax refund from the local government of at least 0.8 per cent of the deal price.

It is part of the mainland’s nationwide effort to sell down record high housing inventory, an issue that is especially acute in small cities, where demand seems to have stalled amid a slowing economy.

The property market downturn was a drag on China’s economic growth by roughly 1.1 percentage points last year, according to investment bank J.P. Morgan’s estimate and many economists expect the authorities to intensify policy support this year, including a possible interest rate cut in the first half, to stabilise growth in the world’s No 2 economy at around 7 per cent.

That will help bring about a cyclical rebound of the housing market in the second quarter after bottoming out in the first quarter, according to the latest forecast from Hong Kong-based independent research and analytics firm Real Estate Foresight, who correctly predicted the trend in 2014.

“We may not yet be at the bottom of the cycle but there are more and more signs of upcoming cyclical pickup in volumes and later in prices,” said Robert Ciemniak, the company’s founder and chief executive officer.

Others are less optimistic. Li Junheng, head of research at New York-based JL Warren Capital said: “According to our primarily home market tracking data and conversations with developers, we believe that the downward momentum continued and will likely accelerate in the first quarter of 2015 if the anti-corruption investigation deepens among the developers.”

Debt defaults by Shenzhen-based developer Kaisa Group Holdings earlier this month have spooked global investors and injected a note of caution among domestic lenders. Global trade credit insurer Euler Hermes warned earlier this week of heightened insolvency risk and deteriorating payment terms in China. The specialist in the areas of bonding, guarantees and collections expected to see a 5 per cent rise in the number of Chinese companies filing for bankruptcy this year to 2,760 cases.

The still unfolding crisis drove up mortgage rates in Shenzhen this month, according to Rong360, a mainland financial product search engine. Its January report showed mortgage rates fell in 19 of the 35 major cities it tracks, including Beijing, Shanghai and Guangzhou, while it increased in 13 cities.

“At current levels, mortgage rates (for first-time home buyers) are nearing banks’ bottom lines unless the central bank cut interest rate again,” Rong360 said. “Relaxation in mortgage loans to second-time home buyers will soon spread nationwide and the down payment will likely be lowered as well.”

While that is still pending, authorities have announced a flurry of other measures in the past few days.

Hangzhou said last Saturday it would provide cash subsidies of up to 1 million yuan, a step it took in past downward episodes of property values.

A meeting by the country’s housing ministry last week instructed cities suffering serious housing glut to buy the inventories with government money to pump up their reserves of affordable homes for low-income families – effectively killing two birds with one stone.