Policymakers face a dilemma as lower mortgage rates and relaxed home ownership restrictions have failed to revive demand, threatening a prolonged downturn.
China’s embattled property market faces a policy dilemma as buyers shrug off lower mortgage rates and relaxed home purchase limits amid a slide in confidence triggered by mortgage boycotts and financially distressed developers, potentially delaying a rebound analysts warn.
Stimulus efforts have failed to gain traction as sales slowed sharply during what is usually the peak buying season. New home sales fell 27.3% m/m in the first week of September and 24.3% m/m the following week, according to Guangdong Urban & Rural Planning and Design Institute chief researcher Li Yujia. This translates to y/y falls of 38.5% and 59.8%.
But cheaper home loans have failed to entice buyers, said Li, noting that mortgage rates have dropped to record lows in many cities. Home loan rates have tracked cuts to the five-year Loan Prime Rate that banks use to price mortgages. The five-year LPR was cut 15bps in August, the second cut this year.
The average mortgage rate in September for first home buyers in 103 key cities was 4.15%, down 159bps from last year’s high, according to Beike Research Institute data. The second home rate dropped 108bps to 4.91%.
POLICYMAKERS DEMAND ACTION
Top policymakers have urged cities to create specific plans to stabilize the housing market, spurring local authorities to relax restrictions. President Xi Jinping has thrown his support behind the relaxation of home buying restrictions in all cities except four tier-one cities, REDD reported last week.
Since September, so-called new tier-one cities, including Qingdao and Suzhou, have broadly relaxed home purchase limits except for some main districts.
However, it’s unclear whether confidence in buying off-the-plan properties can be restored given the ongoing mortgage boycott and bond defaults by developers. In fact, some homeowners are rushing to prepay their home loans to save themselves interest payments and also deleverage.
Of the 70 key cities monitored by the National Bureau of Statistics, 49 suffered a y/y decline in new home prices and 61 cities endured a y/y drop in second-hand home prices in August, the highest in about three years, according to Ding Zuyu, chief executive at real estate agency E-House China.
Home prices will fall in the short term on depressed demand and a hit to household incomes from Covid disruptions. Ding is also concerned that buyer psychology could shift and weigh on prices given Chinese buyers prefer rising markets that offer the prospect of selling for more later. He expects the market to bottom over an extended period.
Financial strains on developers are also adding to downward pressure on prices. They have become more reliant on home sales, with sales accounting for 52% of funding in August, according to Li. This was the first time it exceeded 50%.
The dash for cash has sparked fierce sales promotions with deep discounts. There have been reports that Guangzhou, one of the top-tier cities, will allow bigger reductions in home prices of up to 20% from 6% previously.
There should be more support for debt burdened developers as they struggle with higher land costs and a reduced number of new projects to sell, said Qin Hong, former director of the Policy Research Center at the Ministry of Housing and Urban-Rural Development, at a forum last week. She said stimulus to boost demand had already been comprehensive and extensive.
The central government should increase support for local governments to ensure the delivery of housing projects, said Qin. She encouraged more cities to implement pilot sales of completed units as part of reforming a system dominated by pre-sales of unfinished projects.
Restoring developers' access to capital markets is important, including equity financing, said Qin. Measures to help support the value of commercial assets worth CNY20 trillion would help mobilise funds and ease repayment pressures, she said.