Relaxing controls on China’s faltering property market will be key if the country is to meet its annual growth target, as external demand weakens and a Covid lockdown hits activity in major centres including Shanghai, policy advisors and analysts told MNI, calling for more big cities to lower mortgage downpayments and interest rates.
While first-quarter growth in gross domestic product of 4.8% was boosted by exports and an 8.5% expansion in infrastructure investment, these categories may slow, with investment restrained by borrowing constraints and a lack of economically viable projects, making the property sector still more important if the annual GDP target of around 5.5% growth is to be achieved, said Wang Jun, member of the China Chief Economist Forum, a high-end think tank. Infrastructure investment may finish the year with a more modest 5-6% growth, he said, noting that other headwinds to economic performance include not only sluggish consumption but flagging external demand.
After years of heady expansion which took prices to extended levels, prompting official action to limit excessive borrowing by developers, some of which, including the giant Evergrande, ran into trouble, the extent of the property slowdown is now a source of concern to officials as other growth drivers flag. The sector could contract in the coming months, though it should bottom out by around mid-year as authorities further relax restrictions, with real estate investment potentially expanding by 3-5% for the whole of 2022, said Wang, also chief economist at Zhongyuan Bank.
Real estate investment grew only 0.7% y/y in Q1, only slightly better than the historical low in Q1 2020.
BOOSTING DEMAND
Bigger centres, including four first-tier cities, could relax rules on home sales and purchases, as well as on prices and mortgage loans, said Wang, pointing to the call by the People’s Bank of China’s on Monday for local authorities to make reasonable adjustments to minimum down payment ratios and interest rates. It was the first time the central bank has called for new down payment requirements since 2016, noted Yang Yuejing, director of E-house China Research and Development Institution.
More than 60 cities, mainly of smaller size, lowered homebuying thresholds in the first quarter, but so far the market slowdown has not been reversed. Home sales fell 13.8% y/y in Q1 in square metre terms, the second-worst performance on record, as Covid outbreaks hit major centres including Shanghai, Shenzhen and Guangzhou, said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute. Price cuts by developers have also had the perverse effect of slowing demand from buyers hoping for continued capital appreciation, Li said.
Underlying demand for first homes, and for buyers looking to upgrade their current housing, remains robust in big cities, but is being suppressed by existing restrictions on sales and borrowing, said Wang. Any relaxation by major cities of rules including minimum down payment ratios as high as 70% could be a sign that a market recovery is on the way, he said.
It would be helpful as well for the PBOC to guide the five-year Loan Prime Rate, which many lenders use as a mortgage benchmark, down by 10 basis points from its current 4.6%, Wang added.
FINANCING REQUIREMENTS
Developers also need assistance, with Wang noting that failures by struggling companies to deliver building projects on time were contributing to negative sentiment in the property market.
Developers’ appetite for land remains weak, with area purchased slumping 41.8% y/y to a record low in Q1, when funds in place for property companies slid 19.6% y/y, the largest decline on record. Banks’ appetite for lending to them is at record lows, while bond issuance has become largely the preserve of state-owned developers, Li said. Home sales revenue, accounting for 53% of developers’ funding, also fell to a new low in Q1, he added.
Wang expects financial regulators to loosen the so-called “Three Red Lines” rules on developers’ borrowing, as well as caps on the proportion of banks’ loan books linked to property. (See: MNI: China Still Risks Wave Of Developer Default-Advisors)
The PBOC on Tuesday urged financial institutions to maintain real estate financing at stable levels, and not to cut off or delay loans to sound corporate borrowers.
