Mainland China property market expected to see better balance of demand and supply

Mainland China’s property market rebounded in the second half last year and analysts expect a positive 2016 as a glut in inventory has declined and the market is likely to be increasingly supported by easing policies.

“The clearance of inventory will speed up this year as new construction dropped last year and the market momentum is not bad in the light of the supportive policies,” said Carol Wu, head of China research at DBS Vickers.

She said she expected new home sales to grow by 5 per cent to 10 per cent this year.

The central government included destocking among its five economic targets for 2016 after President Xi Jinping urged the reduction of property inventory at a government meeting in November to ensure the sustainable development of the property sector.

Many developers stepped up the clearing of existing inventory and slowed down investment last year.

As a result, newly started property construction fell 14.7 per cent year on year in the first 11 months of 2015, according to the latest official data.

“The inventory has been drawn down a lot compared to the beginning of last year,” said Alan Jin, a property analyst at Mizuho Securities.

Jin added that some second- and third- tier cities would see prices pick up this year as supply and demand returned to healthy levels, while first-tier cities’ home prices would be more stable after a surge in 2015. New home prices in Shenzhen jumped nearly 40 per cent last year.

At the end of November, Suzhou, Hangzhou and Hefei in eastern China were among the cities with the lowest inventories out of 18 leading cities tracked by data provider China Real Estate Index System.

Jin forecasts the policy environment will continue to ease this year, with the central government likely to further cut benchmark deposit and lending rates.

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Beijing has reopened the domestic bond market to developers and has cut interest rates six times since late 2014 to free up liquidity for property sector.

“I don’t see any reason for government to tighten the policy considering other sectors are worse,” Jin said.

Lee Wee Liat, head of Asia-Pacific property research at BNP Paribas, told a media briefing last week that the government would give more support to the property sector this year because of its important contribution to the economy.

Wu said she expected the government would implement additional supportive measures to reduce the number of unsold homes in smaller cities this year such as subsidies to encourage home purchases by people in rural areas and the government purchase of excess housing stock so that it could be turned into social security housing.

However, developers were unlikely to see their margins return to previous heights.

Wu said she expected land prices would remain high in leading cities like Beijing and Shanghai, and that even in smaller cities prices were unlikely to drop because local governments wanted to guarantee their revenue.

“The gross profit ratio for projects in first-tier cities has been squeezed to less than 20 per cent already,” Wu said, while adding that developers would not quit first-tier cities because their markets were big and more resistant to risks.