China is softening its stance on the ailing real estate sector, possibly leading to policy interventions.The recent edict issued by the government reflects a distinct shift in Beijing's attitude towards real estate, according to analysts.This adjustment has been implemented as the Chinese real estate market continues to slump in correlation with the general economic weakness.
China is shifting its stance on the fluctuating real estate sector, making way for potential policy support. Despite Beijing's stringent measures towards the once-hot market, especially against heavily indebted developers such as Evergrande, home sales have declined in conjunction with the country's financial slowdown. At the meeting of top Chinese officials Monday, it was noted that there has been a "substantial adjustment" between supply and demand in the real estate sector, requiring policy adjustments. Furthermore, the readout ommitted the customary phrase "houses are for living in, not for speculating" — commonly utilized by China to signal a stringent stance on the property market. According to Larry Hu, chief China Economist at Macquarie, the foremost concern for policymakers is no longer financial risk, but rather recession risk.
Hu noted that in an authoritarian system like modern China, what is said from the highest levels is more significant than specific policies. He also predicted that more specific information would be released in the upcoming months. After the People's Bank of China held a press conference on July 14 where they first voiced alterations to the balance of supply and demand in real estate, the Politburo meeting followed suit soon after with a statement implying the same. Qin Gang of the China Real Estate Research Institute highlighted this as a "much clearer understanding of the gravity of the situation", and anticipated policies which would aid the real estate industry and consumption to come out soon. Tuesday saw a 9.78% increase in the Hang Seng Property Development and Management Index, alongside news from the state media that lighter restrictions on purchasing could arrive later in the year for small cities in China.
Despite Beijing having a positive attitude, Ricky Tsang, the director of corporate ratings at S&P Global Ratings, is watching for practical changes, such as reducing the requirements for acquiring a real estate, diminishing down-payments and eliminating price caps. He still predicted that property sales will diminish during this year and next, primarily influenced by the poorer cities. According to data provided by state media, from July 1 to 20, floor space transaction dropped more than one-third from last month, and one year ago when China's Covid restrictions were in effect. Investment in real estate also dropped 7.9% in the first part of the year, and is forecast to remain low in the immediate future, based on remarks from the National Bureau of Statistics.
Zong Liang, chief researcher at the Bank of China, noted that China's growth targets have been affected by this reduction, and that policymakers have been seeking out more relaxed governing instead of greater control. He pointed out that the Politburo conference's rejection of the idea of a property tax signified that they have accomplished a certain amount of success, which could mean some level of price volatility will be approved in some segments of the real estate market, but not for properties intended for basic living. Lastly, he highlighted that affordability of housing, education and health care are areas of concentration for Beijing.
House prices last year were high and many new developments had halted construction as financing difficulties presented themselves. As apartments are often sold before they are built, the low rate of sales further affected the cash flow of the developers. In an effort to help, policies have been extended this month since first appearing back in November, but it's been difficult for developers to turn to the equity and bond markets for resources. Tommy Wu, senior China economist at Commerzbank, believes that policy should be focused on assisting developers in getting the funds they need to complete construction. Wu says “when housing completion is on a firm footing, potential homebuyer’s and sales will improve in a sustainable way. This will give developers the support they need for debt repayment and create a virtuous cycle.”
Concerns regarding China's housing market stepped into the limelight in late 2021 when developer Evergrande defaulted in spite of heavy indebtedness. According to Moody's, fewer Chinese developers are likely to default in 2021, owing the the majority of them having applied for deferment of maturities till late 2022. Kaven Tsang, Senior Vice President at Moody's, asserted that the peak of defaults happened in 2022 with 26 incidents among Chinese real estate developers listed under Moody's coverage. Singularly, only one issuer has defaulted during the first half of 2021. Nonetheless, from Beijing's end, clarity needs to be offered. In spite of a 70-basis point decrease in mortgage rates since the last peak, neither has the home prices nor the number of transactions been able to show growth, as per Gary Ng, Senior Economist from Natixis CIB Asia Pacific. In Ng's words, “If it had been a decade ago, the home price would have skyrocketed already. This evidently implies that confidence is an issue here”.
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