China analysts hunt for clues of property market turnaround

Covid-19 curbs and other policy shifts in China have created short-term uncertainty, adding to longer-term challenges. PHOTO: AFP

BEIJING - China has taken several significant steps recently to reverse its worst property slump in modern history, leaving economists searching for signs of turnaround clues.

Home sales, land purchases, new housing starts and developer financing will all be key to showing how well the sector is able to recover in the coming year, economists told Bloomberg.

The market’s historic turmoil will make a comeback difficult, even with the slew of measures announced in recent months to address a developer cash crunch and boost housing demand. Covid-19 curbs and other policy shifts have created short-term uncertainty, adding to longer-term challenges such as changing demographics.

“The market is still looking for a bottom,” said Mr Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle. “Any recovery will be mild and it won’t reach the previous peaks. The good old days are over, considering mega-trends on China’s population structure and urbanisation pace.”

Here are some of the main indicators that analysts are looking at to gauge the strength of China’s real estate market:

Housing sales

One sign the market has found a bottom would be home sales volumes returning to pre-pandemic levels in cities, according to Mr Duncan Wrigley, a chief China economist at Pantheon Macroeconomics.

He is also looking for a rebound in existing home prices, along with indications that developers are starting to end discounts.

The strength of the recovery will depend on further changes to China’s zero-Covid policy, Mr Wrigley said. He added that policies supporting lower-tier cities – such as the shanty-town redevelopment programme he said was key to the 2016 to 2018 recovery cycle – would be another factor.

National housing sales have been falling since July 2021, according to Bloomberg calculations based on data published by China’s National Bureau of Statistics (NBS). Year-on-year drops in both sales value and volume exceeded 40 per cent in April when the financial hub Shanghai was locked down because of a Covid-19 outbreak.

All of the NBS real estate figures show year-to-date data and are published roughly during the middle of each month. City-level figures are made available by industrial or financial information providers, which compile local government data on a weekly or sometimes daily basis.

A way to confirm the market is recovering is when the data starts showing three straight months of positive growth compared with the months before, as well as with a similar period in 2019, before the pandemic, according to Mr Pang.

That is partly because developers tend to try to make their earnings reports look better by offering discounts to home buyers towards the end of the quarter, thereby boosting sales. The trade-off, though, is that such actions can sap some demand in the following months.

Land purchases and new housing starts

Land acquisitions and new housing starts are important for assessing confidence among developers, along with the sustainability of any market recovery, according to economists.

Both indicators have been falling on a yearly basis for most months since early 2021 as developers ran into financial trouble. Since July 2021, the slump in new housing starts, for example, has deepened to double-digits.

Even with the latest policies announced by the government, it will be difficult for either land purchases or new housing starts to reach pre-pandemic levels, according to Mr Wrigley.

“The policy support is focused on completing and delivering pre-sale homes, leaving developers with few funding channels for new projects,” he said.

The slide in land purchases, meanwhile, has dealt a heavy blow to Chinese local governments’ revenue, leaving their fiscal gap at historically high levels. That has prompted state-owned enterprises (SOEs) to step up buying: local government financing vehicles replaced builders as the biggest land buyers earlier in 2022.

Despite the shift towards government-led buying, analysts still expect land sales data to remain a good indicator.

“The data distortion is not a problem,” said Mr Zhaopeng Xing, an analyst at Australia & New Zealand Banking Group who expects China to gradually nationalise the property sector. “SOEs will dominate in the future.”

Property financing

The total amount of funds received by real estate developers has been in decline since July 2021, according to Bloomberg calculations based on NBS data. Funding has plunged more than 20 per cent year on year in every month of 2022 since March.

A recovery in this area may be a sign that the government’s policies – including steps to help builders get the cash they need to finish construction on projects that have already been sold to home buyers or to repay their debts — are having some effect.

“Property-related credit growth should improve as it’s something the government can control,” said Mr Larry Hu, head of China economics at Macquarie Group.

Policymakers have pushed banks to provide more loans, and have allowed developers to tap more money held in pre-sale accounts, the biggest source of funds for the companies.

And the government in late November lifted some restrictions on corporate stock sales, after introducing a programme in August to facilitate developers’ selling of bonds.

Nearly 70 per cent of developers’ cash comes from self-raised funds, which include debt and equity financing, along with deposits and advance payments from home buyers, NBS data shows. Domestic loans, including bank lending, make up about 12 per cent, while mortgage payments comprise around 16 per cent. BLOOMBERG

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