China: No bubble burst in residential property market - ING

In China, there is going to be no bubble burst in residential property market as the government is deflating the bubble city-by-city, according to Iris Pang, Economist at ING.

Key Quotes

“As expected home prices in general continued to rise on a yearly basis in July, albeit at a slower pace, from 9.95% YoY in first tier cities to an 8.35% increase. More cities experienced monthly decreases in home price, but they were still the minority (9 out of 70 in July from 6 in June) while most others (56 out of 70) posted monthly rises in prices.”

“The central government has set the tone that residential properties should serve the purpose of consumption rather than speculation. In practice, tightening measures come from purchase restrictions imposed by different local governments and mortgage policies from banks guided by local PBoC offices. As a result, home price cycle differs among cities. Home price has peaked in first-tier cities but not yet in third-tier cities. We expect tightening measures to also reduce transaction volume of first-tier cities.”

“Deflating the bubble doesn’t necessarily mean the market will cool down. Property developers are getting more land as reflected by the 41% YoY land sales increase in July (CNY5,428bn YTD), which points to the full year sales to the tune of CNY10tr in 2017.”

“How are the property developers funded? Tightening mortgage policies increase the soundness of the real estate sector. More funds of property developers have come from down payments and less from self-raised funds, thus increasing cash flow and reducing new debt burden of property developers.”

“Will further tightening of home purchase restrictions hurt property developers? The short answer is yes. But the central government has finely managed home sales. The city-bycity tightening strategy, in fact, may help property developers to surf through the tightening cycle because there are cities that still do not face any purchase restrictions. And big property developers that have projects nationwide are likely to suffer less than smaller ones with projects concentrated in a small number of higher-tier cities.”

“In short, we expect more local governments to tighten home purchase policies in coming months. Therefore, the possibility of bubble burst of home price in China continues to fall.”