EXECUTIVE SUMMARY
- Sales of commercial residential buildings in the first few months of 2021 saw significant year-on-year (YoY) increases, due to the low base effect from COVID-19. However, monthly home sales slowed in 2H21 and recorded YoY declines as liquidity concerns stemming from the Evergrande crisis gripped the minds of investors and homebuyers alike. The pace of month-on-month (MoM) home prices gains across the top 70 cities in China has also been slowing since June, entering negative territory in September and October. However, we think that China’s home sales for 2021 will still exceed that of the previous year.
- During the Two Sessions meeting held in March, the central government reaffirmed that “houses are for living, not for speculation”. The goals of achieving stability in land prices, home prices, and market expectations were also reiterated. This stance was echoed by various local governments throughout the year, as they continued to implement restrictive housing policies from 1Q21 to 3Q21.
- The restrictive housing policies have been somewhat effective in stabilizing home prices so far, though poor homebuyer sentiment in recent months was also a contributing factor. The average land cost in 10M21 has also climbed at a slower pace compared to 2020. Centralized land auctions, which were introduced in 22 cities this year, coupled with the 3 Red Lines directive and bank loan curbs would likely have contributed to a slower growth in land prices. However, many developers have also drastically slowed down their land purchases in 2H21 to shore up cash amid the current liquidity crunch.
- Looking ahead, we think that housing policies will remain restrictive across most parts of China to curb home demand speculation and to keep home prices stable. That said, we expect to see more selective easing of housing policies in certain cities, similar to what we have witnessed in Harbin, Yiwu and Chengdu, which include the relaxation of pre-sales criteria, expediting the release of pre-sales proceeds held in escrow accounts, and the introduction of more talent attraction schemes. Many local governments finance their fiscal budgets by selling land, and have a clear incentive to prevent a crash in their respective local housing markets. Since September, we have also seen several Tier-3 and 4 cities enacting policies to limit the magnitude of discounts that developers can offer on newly-built homes.
- The recent turmoil in the Chinese property market, which was arguably caused by tighter credit policies to begin with, has prompted the authorities to roll back some of these credit policies to support the battered sector. There have been some early signs of easing in October and November. These include lower mortgage rates, the acceleration of mortgage and real estate loan disbursements, the increasing of lending quotas, the easing of land bidding rules, the potential relaxation of domestic bond issuance rules, and the potential exclusion of M&A-related debt from the 3 Red Lines.
- Although we lack the confirmation and the details of some of these examples of easing credit policies, we think that they could be early indications of the regulators’ willingness to provide support to the ailing sector, and that more of such easing may follow. However, we expect any loosening of housing or credit policies to be measured in order to prevent an unwanted increase in home prices or a deviation from China’s long-term deleveraging goal for the sector.
- We think that the weaker demand for homes in China will likely persist till the end of the year and spill into early 2022. However, we expect sentiment to pick up again by 2H22 as more housing and credit policies are selectively eased to support the flailing sector. We also expect the YoY growth in gross floor area (GFA) sold for the whole of 2021 to be slightly lower than where it stands now (7.1%) considering the currently weaker homebuyer sentiment, and we anticipate the growth in GFA sold in 2022 to keep within a 1-5% range.
- We opine that the weaker home demand will likely dampen the overall growth in home prices for 2022. We expect slower growth in home prices for 2022 compared to 2021, with the home price growth to be a low-to-mid single digit for 2022. We also expect total home sales in 2022 to surpass that of 2021 albeit at a reduced pace.
