China：How Is the Property Market Doing？

According to our recent talks with clients, the market seems to hold aconsensus view that the property market will not repeat the 2019-2021 boom, anda new equilibrium will be reached in the next few years.

As the property market matters for the macro perspective, we also see theimportance of gauging the dynamics of the property sector.

We believe that headline property sales will continue to improve,particularly considering the low base effects in early Q2 due to Covidlockdowns in 2022.

However, there are a few weak spots which have been emerging. Our sectoranalyst noticed that property sales have been illustrating somewhat slowingmomentum recently, according to frontline response from both propertydevelopers and sales platforms. Our field study in a few areas in Shanghai alsosuggests that the price premium of resale apartments against new projects hasbeen diminishing. Our general feeling is that prices of resale apartments havedropped by about 10% from the peak in early 2022. In the meantime, sales of newapartments in Shanghai appear to be cooling as well.

Balancing all the factors, we believe that the recovery trend in China’sproperty sector will continue over the next few quarters, and headline propertysales will likely improve massively this year thanks to base effects. However,an inverted V-shaped growth trajectory is more or less warranted, which impliespolicy will have to be more supportive in the second half of 2023.

Offshore investors seem to hold very mixed views on China’s propertysector for now. One camp sees that theproperty market will be well supported thanks to the government's policiesparticularly on the financing side. However, the other camp thinks that Chinesefamilies are unlikely to leverage up again due to cautious income outlook and therapidly ageing population in China.

To some extent, we believe that investors are not fully divided. As the propertyoutlook remains uncertain, the government will continue to roll out supportivepolicies. However, policies so far are insufficient to guarantee a sustainablerecovery in the property sector. From this perspective, the market seems tohold a consensus view that the property market will not repeat the 2019-2021boom, and a new equilibrium will be reached in the next few years. As theproperty market matters for the macro perspective, we also see the importanceof gauging the dynamics of the property sector. 

Property investment, which accounts for 22% of total fixed assetinvestment, rebounded somewhat at the beginning of 2023. However, growth remains in the negative territory, still pointing to alukewarm picture. On the flip side, manufacturing investment continues tooutperform and has maintained stable growth recently. The difference betweenmanufacturing and property investment somehow reveals authorities’ policy directionas well. Specifically, the government intends to upgrade the manufacturingsector, while preventing the housing sector from overly speculation.

That being said, healthy development of the property sector is highlydesired from the policymakers’ perspective. As the property market is highly correlated with many upper- anddownstream sectors, and remains a key concern for financial stability, thegovernment will continue to provide support to struggling property developers.

Some positive headline growth in property sales can be expected in thenear future. Weekly sales data fromthe big Chinese cities suggest that the new home sales in early 2023 roughlyfollows the pattern of that during the same period of 2019. As this datasetonly covers top-tier cities, the seemingly encouraging data might unmask the relativelyweak sales in the lower-tier cities. Hence, given the big divergence acrossdifferent cities, which is also reflected in housing prices, we need tointerpret the high-frequency data with caution.

According to data compiled by the National Bureau of Statistics of China,property sales for the entire country contracted by 3.6% in January andFebruary, from -24.3% previously. As the recovery trend remains valid, webelieve that headline sales data will see further improvement. Given the lowbase last year due to Covid lockdowns, headline sales growth is looking upbeatin the second quarter of this year.

However, a few weak spots have been emerging. Our sector analyst noticed that property sales have been illustratingsomewhat slowing momentum recently, according to frontline response from bothproperty developers and sales platforms. Our field study in a few areas inShanghai also suggests that the price premium of resale apartments against newprojects has been diminishing. Our general feeling is that the prices of resaleapartments have dropped by about 10% from the peak in early 2022. In themeantime, sales of new apartments in Shanghai appear to be cooling as well.

Slowing frontline sales momentum indicates that headline growth, whichis based on contract signing figures (normally 1-2 months later after the dealis reached), is likely to decelerate significantly once the favourable baseeffects fade. This also means that policy support is still highlyneeded to ensure healthy development in the property market. Obviously,lowering financing cost of home purchases is something that can be donerelatively easily. From a medium- to long-term perspective, income outlook remainsthe key factor for the housing market.

Balancing all the factors, we believe that the recovery trend in China’sproperty sector will continue over the next few quarters, and headline propertysales are likely to improve massively this year thanks to base effects.However, an inverted V-shaped growth trajectory is more or less warranted,which implies policy will have to be more supportive in the second half of2023.

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