ANZ Economists: Real Estate Downturn Cyclical, Not a Crisis

There are a number of charts in the article. This first one shows 10-year average real estate investment growth (y-axis) and 10-year average population growth (x-axis). Cities such as Shijiazhuang and Guiyang are way up top and towards the left. Shenzhen, Shanghai and Beijing are the three bolded cities out towards the right (bottom to top).

Here's yoy price changes.

Here's home price to income. As I've written, China's rapid wage growth puts a rising floor under the market.

经济师：中国楼价远称不上高 开发商不会降价清售

· Although many indicators show a slowdown in China's real estate market, we do not believe that China's property market will collapse, China's property market is experiencing a cyclical slowdown. The recent slowdown in the real estate investment and fixed asset investment slowed overall trend is consistent.

· China's large listed developers and developers have the ability to cope with the current round of market slowdown floor. This also means that developers are unlikely to cut prices to clear unsold sell those houses. In addition, prices of Chinese household income ratio also remains a reasonable level.

· As long as the process of urbanization continues, China's demand for real estate will continue to maintain an upward trend. Although the real estate investment growth is likely to slow down significantly, but the housing area under construction will continue to increase in the coming years, and peaked in 2020.

Chinese market liquidity reporting

China's central bank recently re-released on the China Development Bank loans $ 300 billion for promoting slum upgrading. The move is seen as the central bank for the foreseeable future will remain accommodative monetary policy.

This week the chart: the existence of China's real estate market, the internal differences: rapid growth in real estate investment, but slow population growth in the city, facing the greatest downward pressure on prices.


China's property prices experienced double-digit growth last year, after the development of the real estate market this year, there have been ups and downs. In the past few months, new home sales for each line of the city experienced a significant decline in the inventory of unsold new homes also experienced a significant rise since the fourth quarter of last year.

Second-hand housing market growth also appeared to slow down. Mainly reflecting price movements in the Central Plains hand housing index, since 2014, first-tier cities appeared second-hand housing prices fell year on year, of which Beijing second-hand housing prices from early 2013 began to appear a year on year decline.

Although all indicators show that China's real estate market slowing, we believe that this does not mean that China's property market is about to collapse. We believe that China's real estate market is experiencing a cyclical slowdown, which have appeared in the past several economic cycles too, is a normal phenomenon. As long as China continues to promote urbanization, housing construction in China over the next few decades, there is still much room for development. As the real estate market has been greatly affected by the purchase of the policy, credit tightening and other macroeconomic policies, China's property prices volatility and therefore strong. We also believe that the following factors are not sufficient to make China's real estate market collapse .

First, and most obviously, China's home purchase restrictions in 39 cities still in the implementation. This 39 cities, including 70 cities in the vast majority of a second-tier cities, which also makes the current market price does not reflect the real supply and demand situation in these cities. In addition, some 39 cities in the Midwest and the capital city of the second-tier implementation should not purchase because of their relatively low prices and the affordability of higher prices. These central and western cities, should relax the restriction policy.

If the local government has gradually relaxed the restriction policy, pent-up demand will be released, the real estate market will therefore be supported. Lower prices, coupled with the ease of purchase of the policy, attract a large number of potential buyers into the market in the coming months.

The real estate market in each city will each develop. Most first-and second-tier cities property prices will likely remained stable, due to the weak new home sales in the first quarter, inventories of unsold new homes sales in these cities is equivalent to 12-15 months. However, if new home sales rebound to historical averages, the current unsold new homes will be faster to inventory. In some third-tier cities, destocking process may be more difficult, especially in Wenzhou (unsold new home inventory is equivalent to sales of 42.5 months), Maoming (32.5 months) and Dandong (32 months).

Second, it is worth noting that China's real estate market is very strong cyclical. In the past decade, China's real estate market, there were two distinct and complete cycles: the first one is from 2007 to 2009, the second from 2009 to mid-2012. This cycle is currently in progress from the start of 2012 and reached its peak at the end of last year, there began to appear down. Therefore, we believe, without too much about the current downward trend in the real estate market. Like stock prices, as prices rose rapidly after the inevitable decline is also required.

The current slowdown in real estate investment, the situation appeared and fixed asset investment is consistent with the overall slowdown, which also reflects the intention of the government to promote economic structural adjustment policies. From this perspective, the slowdown in real estate investment is not due to a lack of confidence in the market, which is the global financial situation suddenly crash when demand for property crisis is different. With the decline in investment, the future supply of the property market will also decline, and thus the prices play a supporting role.


Third, the Chinese property market supply response to changes in demand conditions very quickly. With the slowdown in housing sales, the first quarter of 2014, new construction housing area also experienced a significant decline. Developers also slowed down the pace to buy land, land reserves are held to very low levels. All of these are further confirms our view, China's real estate market has adapted to periodic adjustments based on changes developers will cycle to actively adjust the supply.

In addition, recent data also showed that China's large listed developers and developers have the ability to cope with the current round of market slowdown floor. This also means that developers are unlikely to cut prices to clear unsold sell those houses . Table 1 below shows the effect of a 10% price reduction prices listed developers will be caused. Data in the table shows that if 10% of the property price, developers can at least get a 25% profit margin. At the same time, from liquid assets and short-term interest rate than the payment, the developer's liquidity position remains good, if 10% of the property price, this ratio is still above 1.0.


We also found that the balance of public housing prices than in the past few years there has been a significant decline, from 90 percent in early 2009 to the current level of 50%, which also reflects the financial position of these companies is better. Since some small developers may be difficult to get through this period of adjustment, we believe some important acquisitions and mergers and acquisitions housing prices will likely occur in the near future.



In the past few years, the concentration of Chinese real estate industry was also a significant rise. Specifically, in 2013 accounted for 10 ward rate of 13.3% of the market, and 2011 was only 10.7%. In addition, the market share of 50 ward prices rose in the past three years by 4.6 percentage points to reach 25.4% in 2013.


Finally, we will compare the prices in different countries, from the perspective of the global and regional situation to see if China's real estate market.

· Rental yields tier cities in China remained at 2.5% to 3.0% level since 2010. Although the rental yield is lower than deposit rates, with the central bank to enter China's economic slowdown easing cycle, negative interest rates will change.

· Many people have pointed out that Chinese people can afford the purchase rate is worrying, but we found that although the ratio of house prices and household income in recent years there has been increased, but remained at a reasonable level 6.3. At the same time, despite the very high rates and incomes than in first-tier cities such as Shanghai reached 8.8 times, Beijing reached 11.2 times, we see first-tier cities in Asia this ratio is high, which reached 18.8 times in Hong Kong, Macao and 14.3 times Japan 10.

From a global perspective, China's property prices still far from "high." Data show that Shanghai's average room rate of only 33% in Hong Kong, Singapore, 40%, 60% in Mumbai and Tokyo. But interestingly, Shanghai's rental yield (2.66%) was consistent with Hong Kong (3.0%) and Taipei (1.57%) .

This means that, as long as the process of urbanization continues, China's demand for real estate will continue to maintain an upward trend. State Council Development Research Center data show that the town's housing stock by the end of 2013 is 206 million square meters, equivalent to 28.1 square meters per person. According to official data, urban residents (including non-account workers to urban migrant workers) is approximately 730 million people in 2013.

If the next decade, 200 million rural residents have moved into the city, China still needs to invest heavily in real estate. Although the real estate investment growth is likely to slow down significantly, but the housing area under construction will continue to increase in the coming years, and peaked in 2020.