China Says Will Not Rely on Housing for GDP as Market Thinks Otherwise

China's housing narrative has gone through quite a shift in five months. The year started with analysts saying an RRR cut would have no impact on the market. Today, the government is warning against another speculative bubble as various cities heat up. In between was a single month of credit growth equivalent to 5 percent of GDP.

The government is also dealing with a slowing economy and a metastasizing trade war with the United States. In light of this, speculators went from thinking housing would benefit from modest easing policies (even before the big credit burst) to thinking the government may rely on housing for GDP growth——and it will by default if it stimulates the economy in these conditions.

First, a stroll down memory lane to see how the narrative shifted over the course of five months.

Back in January, the official story was the RRR cut would not spark a housing boom. In No Monetary Stimulus Coming: China's Housing Trap, I wrote:

In the wake of the RRR cut and overall decline in interest rates, including mortgage rates, articles about the impact on housing are coming out. The common theme is no, housing isn't going to be revived by the RRR cut. However, the bigger story is why these articles are being published. Chinese expect monetary stimulus will save housing. If at any time China decides to pump money into the economy, all levels of Chinese society are going to pour capital into the housing market. Exactly what the Chinese government doesn't want.

China was in the midst of creating credit equivalent to 5 percent of GDP that month.

In February, the credit surge hadn't hit yet and deleveraging/tight credit were combining with an exodus from lower-quality cities: New Home Supply and Sales Falling in Lower-Tier Cities

By late February: NDRC Calls for Easing Urban Residency Requirements

By early March, policy easing was underway across the board, although real estate experts and governments themselves all claimed these were minor policy tweaks that did not amount to policy easing: Double Double China's Housing Bubble: Policy Loosens Across the Board.

Chinese real estate policies have never really worked. When credit growth decreases, home sales and prices cool. When credit growth increases, home prices rise no matter what regulations were in place. Tighter regulations in the last cycle intensified speculative fever as capital flowed into an ever shrinking slice of the market. Speculators kept buying because they banked on policy easing at the cycle bottom. Those speculators have been proven correct thus far.

If China persists with tight real estate controls and increases credit growth, it will be the first major test of government control over real estate. It will also be a major test of the financial system. The prior rounds of credit growth were driven in part by real estate investment. Barring another forced stimulus, will credit grow if the government successfully restricts real estate investment and speculation? History says government controls will fail, credit growth will rise at least temporarily and home prices will rise double-digits (annualized) starting with first- and second-tier cities.

Part of the easing has been carried out under the guise of a "talent war" as cities attract skilled workers, but it has already morphed into a "population war" after cities lowered standards to include anyone below age 50.

By mid-March: Housing Market Rescues Begin, Subsidies for Buyers, Lotteries Whip Up Speculative Fever

In April, the jawboning started: Home Prices Won't Rise: Jawboning or Hammering Home Credit Policy? and also Again: Houses Are For Living In, Not Speculating On. By the end of April: Narrative Shift: Cities Need to Guard Against Speculative Homebuying:

For months, Chinese media and government officials have been saying the shift from a "war for talent" to a "war for population" didn't amount to policy loosening. High-level govt officials stressed that homes are for buying, not living in. Most articles stuck to saying the changes weren't loosening and wouldn't have a major impact on home prices. That is now changing.

And then came May.

No Stimulus is Coming! Second-Tier Land Boom Triggers Govt Warning
Real Estate Restrictions Coming Back
Residential Land Sales at New All-Time High

A new property opens for sale in Shanghai, apartments going for $1 to $2 million.

Your daily China quiz.
What are these people lining up to buy? pic.twitter.com/frlysXcLUd

— William Wang (@cowboyInNY) May 20, 2019

In the midst of all this is an economic slowdown in the rest of the economy (not steel though, another sector supposedly being reined in). Local governments finance investment with land sales, property development fuels GDP growth, it seems to be the only major sector delivering growth and therefore, people expect the government will let it run.

To clear up the growing confusion, the People's Daily says China will not rely on housing speculation for GDP growth.

iFeng: 人民日报：中国不会靠炒房拉动经济
Sogou: People's Daily: China Will Not Push Economy by Real Estate speculation
The subheader:

"City-by-City Policy" is by no means "City-by-City Relaxation"

Recently, with the economic and trade friction between China and the United States escalating again, how to ensure stable economic growth in China has received extensive attention at home and abroad. Among them, there is a view that China needs to relax real estate regulation to stimulate the economy. In response, analysts pointed out that China's development is still in an important period of strategic opportunities. China's economy has sufficient resilience, great potential and continuous innovation vitality of generate. Faced with the impact of external uncertainties, China will take the five new development concepts of "innovation, coordination, green, openness and sharing" as a guide to further push forward the structural reform on the supply side, pursue higher quality development, demand dividends from reform, potential from opening up and motivation from innovation. Therefore, China will firmly adhere to the position that "houses are for living, not for speculation" to ensure that the real estate market is on the right track.

Property Market Continues Steady Keynote

Since the beginning of this year, the property market in all parts of China has maintained a generally stable tone.

Liu Jianwei, a senior statistician of the City Department of the National Bureau of Statistics, pointed out when interpreting the changes in the sales prices of commercial residential buildings in 70 large and medium-sized cities in April 2019 that the real estate market has basically maintained a stable situation by further implementing the long-term regulatory mechanism of "one city, one city, one policy" and the main responsibility of the city government.

...Hot city regulation increases

Suzhou, Jiangsu Province, has received attention in recent months due to the rapid rise in the property market. During this period, the phenomenon of "queuing up to choose houses" and "selling houses upside down" resurfaced once again. Shanghai Yi Ju Real Estate Research Institute's "Baicheng Residential Inventory Report" shows that Suzhou's real estate market sold 750,000 square meters in March, up 103% month on month and 47% year on year.

In response, the Suzhou municipal government has decisively issued relevant measures to restrict the transfer of newly built commercial housing in the whole Suzhou industrial park and some key areas of Suzhou high-tech zone. At the same time, we will adjust the pricing rules for land transfer and adjust the pricing conditions for land transfer from a fixed value to an interval setting.

At the same time, the relevant departments of the state have also paid timely attention to the phenomenon of heating up the property market in hot cities. A few days ago, the Ministry of Housing and Construction, on the basis of an early warning notice for 6 cities on April 19, issued an early warning notice for 4 cities of Foshan, Suzhou, Dalian and Nanning, where the price index of newly-built commercial residential buildings and second-hand residential buildings has increased significantly in the past 3 months. The Ministry of Housing and Construction also requires that all localities should always adhere to the position of "houses are for housing, not for speculation", further strengthen market monitoring and analysis, solve problems in the market operation in a timely manner, and earnestly implement the requirements of stabilizing land prices, housing prices and expectations to ensure the stable and healthy development of the real estate market.

Making clear the sentiment in the sector is a separate article on the topic, which says the fire rises again.

iFeng: 房地产市场虚火再起 官方“泼冷水”降温预警十城
Sogou: Real Estate Market Fire Rises Again, Officials Pour Cold Water

China Banking Regulatory Commission to Rectify Financing Chaos

On May 17, the China Banking Regulatory Commission issued the "Notice on Carrying out the Work of" Consolidating Anti-chaos Achievements and Promoting Compliance Construction ",aiming to prevent and resolve financial risks from various aspects, consolidate the achievements of previous rectification work and prevent the market chaos from rebounding. Many of the contents of the rectification involve financing chaos in the real estate sector, which has curbed the possible signs of excessive price rise in real estate from the side.

In the rectification of chaos in the implementation of macro policies by banking institutions, the real estate industry policies are mentioned separately as follows: on-balance-sheet and off-balance-sheet funds are directly or in disguised form used for land leasing financing; Not strictly examining the qualifications of real estate development enterprises and illegally providing financing to real estate development projects with incomplete "four certificates"; Personal comprehensive consumer loans, operating loans, credit card overdrafts and other funds misappropriated for the purchase of houses; Funds illegally flowed into the real estate market through shadow banking channels; Loans such as M&A loans and operating property loans are not carefully managed, and funds are diverted to real estate development.

During the rectification of chaos in the non-bank field, the implementation of macro-control policies in the trust field also involves the implementation of macro-control policies in real estate, including providing direct financing to real estate development projects with incomplete "four certificates", substandard qualifications of developers or their controlling shareholders, and insufficient capital, or providing financing in disguised form through equity investment+shareholder borrowing, equity investment+poor subscription of creditor's rights, accounts receivable, and specific asset income rights. Directly or in disguised form to provide financing for real estate enterprises to pay the land transfer price, directly or in disguised form to provide liquidity loans for real estate enterprises.

In response to the request of the CIRC to rectify the financing chaos, Jiang Han said that from the perspective of risk control, strict management of funds is the embodiment of the regulatory layer to improve the level of risk control and reduce systemic financial risks. From the overall market point of view, real estate enterprises almost every year have a trend of loosening first and tightening later, which is very normal.

Zhang Bo also said that since the beginning of this year, affected by the relaxation of overall market liquidity, real estate enterprises have greatly eased both the difficulty and cost of financing. Meanwhile, the increase in the first and second-tier property market in the first quarter has also accelerated the pace of home buyers entering the market. As a result, the housing enterprises' enthusiasm for land acquisition in some cities has increased significantly recently and the demand for financing has also increased. In this context, the bank insurance regulatory Commission reiterated that the financing restrictions for housing enterprises are also a moderate tightening of the property market, and the valve for capital supervision may face "slight tightening".

The Ministry of Housing and Construction Interviews Ten Cities

The Ministry of Housing and Construction also responded in the first place. On May 18, the Ministry of Housing and Construction, on the basis of the early warning notice for 6 cities on April 19, also issued early warning notices for 4 cities of Foshan, Suzhou, Dalian and Nanning, where the price index of newly-built commercial residential buildings and second-hand residential buildings have increased significantly in the past 3 months.

The Ministry of Housing and Construction requires that all localities should always adhere to the position that houses are for housing and not for speculation, further strengthen market monitoring and analysis, solve problems in the market operation in a timely manner, and effectively implement the requirements of stabilizing land prices, housing prices and expectations so as to ensure the stable and healthy development of the real estate market.

"If the April 6 interview was only a warning, then the actual naming of the four cities is a clear signal to the market." Zhang Bo said that this interview showed that city-by-city policies for the real estate market were not relaxed, and the frequent landing of talent policies was not a signal of an overall relaxation of the real estate policy. It once again showed that the central government was unshakable in its goal of "three stabilities" in 2019 and would never relax its requirements for the stability of the real estate market in various cities.

Earlier, Suzhou, where the property market is overheated, urgently upgraded its property market regulation policy. On May 11, the Suzhou Municipal People's Government issued the "Supplementary Opinions of the Municipal Government on Further Promoting the Sustainable, Stable and Healthy Development of the Real Estate Market in the City", stipulating that the sale of new houses in all areas of Suzhou Industrial Park and some key areas of Suzhou High-tech Zone will be limited to three years. Second-hand housing in Suzhou Industrial Park is limited to five years.

Suzhou's real estate market is under emergency control. Will more cities follow suit in the future and will the control be stricter and stricter? Zhang Bo said that the introduction of tight control measures in overheated cities and regions will be a high probability event in the future, and cities with relatively high price increases and relatively hot land markets in March-April will face "slight tightening" in the future. Judging from the second quarter, cities with high market popularity, especially second-tier cities, will have more room to add more codes in the future, and the tightness and tightness of regulation are more obvious in these cities.

The real estate market in the future will also be difficult to see the sharp rise in previous years. Jiang Han predicted that the real estate market has completely shifted from speculative market to residential market, the main tone of the future real estate market is stable, and it is almost impossible for real estate prices to surge speculatively.

The Chinese government can only control the housing market with tight credit. I was wrong about no stimulus coming into the year because there was a massive credit boom in January, but otherwise it has gone according to the past experience. Yet another example of credit driving Chinese real estate, with government easing and restriction policies mainly serving as a weathervane.

If China loosens credit again, there will be another housing boom. With USDCNY already approaching the redline, investors using homes for inflation-protected savings and possibly as a haven from currency depreciation, the risk of "hyperinflationary" activity is growing. I still believe the government favors tighter credit and no major stimulus is planned. When push comes to shove, I assume the government will throw caution to the wind on real estate and everything else, including USDCNY. That is, I don't expect a planned stimulus, but a reactive rescue effort once the wheels come off the Chinese (and global) economy. Those more optimistic on China's economy or who do not see elevated tail risk should dial down stimulus expectations since the government would rather nip this nascent housing bubble in the bud.

Related update:

#China’s Fiscal Situation is booming... pic.twitter.com/1zOlBVlCfl

— Michael Nicoletos (@mnicoletos) May 24, 2019