The Chinese government’s recently announced easing measures for the property could provide some modest support to growth in the remainder of the year, says a report by the Australia and New Zealand Banking Group Limited (ANZ).
On March 30, the People’s Bank of China (PBoC) urged financial institutions to support home purchases using a combination of commercial lending and housing provident fund. Specifically, the down payment needed to buy second homes for investment purpose has been lowered to 40% from 60% previously.
In addition, the down payment for second home loans by persons borrowing from the housing provident fund is now set at 30%, down from 50% previously, provided they have no outstanding mortgages.
First-time home buyers using the housing provident fund only need to make a down payment of 20%.
The finance ministry also announced on the same day that sellers of residential property would be exempted from the 5.6% transaction tax after owning the property for two years, from five years previously.
These policies are significant, suggesting that Chinese authorities are deeply concerned about the property market slowdown. In the past year, 41 Chinese cities removed the "property purchase limit" policy, and only five cities – Beijing, Shanghai, Guangzhou, Shenzhen and Sanya – still maintain it.
In September 2014, the central bank relaxed the criteria for "first-time home buyers," home owners who have paid off their mortgages are reclassified as first-time home buyers, and they can enjoy favourable policies, including relatively low down payment of minimum 30% and discounted interest rates as low as 70% of the benchmark lending rates of the current mortgage rate at 5.9%.
Undoubtedly, the activity data at the beginning of this year were much weaker than expected, pointing to a sub-7% growth in the first quarter. This may have triggered the new round of property policy easing.
While China is shifting towards a consumption-driven growth model from the investment-led one, the property sector remains as an important contributor to growth. It is clear that the weakness in the property market has significantly dragged down the GDP growth since 2010, as China’s real estate investment is the bellwether of many Chinese industries.
The property market continued to weaken entering 2015. First, the housing sales declined by 16.3% in the first two months of 2015, compared with a 7.6% drop in the previous year.
Second, the unsold new home inventories picked up to 15.6 months of sales in the 35 major cities by the end of February, versus 14.9 months of sales by the end of last year.
Third, the property prices declined further at the beginning of this year, reflecting limited impact of the policies launched last year.
As sales are still weak and inventories remain elevated, the property investment continues to slow down. China’s property investment growth moderated to 10.4% year-on-year in January-February, and the fixed asset investment growth moderated to 13.9% during the same period, compared with 19.3% and 17.9% for the same period last year.
As the property investment accounts for 20% of total fixed asset investment, soft property investment has increased the risk that the growth of fixed asset investment could fail to reach 15.0% this year. If the softness in the property market continues, China will likely miss the growth target of 7.0% for the whole year.
In addition, land sales revenue growth slowed sharply. For instance, the land purchased by property developers fell by 31.7% year-on-year in the first two months of this year. Meanwhile, the incentives for developers to purchase lands weakened as well, and the lands that held by them declined by 12.2% in January-to February.
Soft land sales have raised the concerns on the sustainability of the local government debts. In the past few years, local governments heavily relied on the land sales revenue to finance the off-budget spending including rapidly growing debts.
Data suggest that the land sales revenue reached RMB3.9 trillion in 2013 and RMB4.3 trillion in 2014, accounting for 33% of local governments’ budget spending in the two years.
If the land sales revenue were to drop sharply this year, local governments will likely have difficulties to finance their investment projects under construction and their existing debts, further weighing on the economic growth and giving rise to default risks of local government financing vehicles.
Perhaps these are the rationales behind of China’s new round of supportive policy in order to stabilise the property market. While these policy easing measures should have positive impact on the overall property market, they may have different impacts across different tiers of cities.
Data suggest that the new home in the first, second and third-tier cities will take 11.9, 15.8 and 21.1 months respectively to offload. Therefore, it is likely that the first-tier cities will likely benefit most.
Based on the supply and demand dynamics, ANZ estimates the prices in the first-tier and some second cities could be boosted by up to 5% this year. In the meantime, the property prices in most of the second and third-tier cities will likely remain soft before their supply and demand conditions return to a reasonable level.
The property easing measures will also boost growth modestly in the second quarter. ANZ revises up the property investment growth to 10% for the whole year of 2015, from 6% to 8% previously. The overall fixed asset investment growth would rebound to 14.5% in the second quarter and 15.0% for the whole year.
ANZ therefore revises up its second quarter GDP forecast to 7.0%, from 6.7% previously, while lowering its first quarter GDP forecast to 6.9% from 7.3% previously. However, the bank maintains full year GDP forecast at 6.8%, but see modest upside if the property market recovers stronger than expected.
Looking ahead, China still has plenty of policy instruments available to support the property market. For instance, China could further lower interest rates and reserve requirement ratio to ease the borrowing burden for both developers and home buyers.
In addition, the government could further lower the property transaction tax. Therefore, a "hard landing" in the property market remains unlikely this year.