China’s sweeping measures to prop up the property sector will need time

According to Carlyle, China is still cheaper on average than India

A real estate construction site in Wanxiang town, Huai'an city, east China's Jiangsu province, May 17, 2024.

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BEIJING – China's sweeping moves to increase support for real estate will take time to show results on Friday, analysts said.

Despite the news, S&P is still sticking to its base case from earlier this month that China's real estate market is likely still “looking for a bottom,” said Edward Chan, director of corporate ratings, during the company's webinar on Monday.

“The significance of the policy rollout last Friday was that the government is rolling out all of these policies at once, on the same day and at the same time,” he said. “This shows that the government is serious and committed to stabilizing the real estate sector.”

However, he noted that for the real estate market to stabilize significantly, demand and homebuyer confidence must increase after a market downturn of nearly three years.

Hong Kong-listed property stocks rose sharply late last week but were little changed on Monday, according to an industry index from financial database Wind Information.

Chinese authorities on Friday cut the minimum down payment requirement to as low as 15%, down from 20% previously, and also removed the nationwide floor on mortgage interest rates.

Policymakers also sought to boost developers' liquidity by releasing 300 billion yuan ($42.25 billion) in financing for local state-owned companies to buy unsold completed apartments to convert into affordable housing .

We believe Beijing is on the right track to ending the epic housing crisis.

Ting Lu

Chief China Economist, Nomura

“Although some of these measures are unprecedented (e.g. the minimum down payment requirement has never been lower than 20% before), they are still insufficient compared to our real estate team's estimates that at least RMB 1 trillion in financing will be required to begin mining “We will find a bottom within a year,” Hui Shan, chief China economist at Goldman Sachs, said in a note on Sunday.

“We believe Beijing is on the right track to ending the epic housing crisis,” Ting Lu, chief China economist at Nomura, said in a report on Monday.

“Beijing has already shifted from building social housing to ensuring the delivery of scores of pre-sold homes to restore buyer confidence, marking a significant step toward clearing up the major mess.”

“However, this is proving to be a daunting task and we believe markets will need to be more patient as they wait for more draconian measures,” he said.

Official data released on Friday showed that real estate investment fell more sharply in April compared with March, with 20.2% fewer new commercial properties sold in the first four months of the year than a year ago. The data also showed that retail sales grew less than expected in April.

The majority of household wealth consists of real estate, while uncertainty about future income weighs on consumer spending.

Restore homebuyer confidence

Homebuyers' confidence depends in part on their economic prospects and whether they can maintain homes they have paid for but not yet received, S&P's Chan said.

Apartments in China are usually sold before construction. But in recent years, real estate developers' financing difficulties and other issues have led to longer delivery times – with some buyers having to wait several years.

How China's real estate bubble burst

“As property prices stabilize, I think more buyers will be willing to enter the market,” Chan said. He noted that buying an apartment is a big investment for most people and therefore they “don't want their capital to shrink.”

The official property price index for 70 cities released on Friday fell faster in April than in March. This is according to an analysis by Goldman Sachs based on a seasonally adjusted weighted average.

Nomura estimates that property prices in China have fallen by an average of 25% to 30% from their historic highs in 2020 and 2021.

He also estimates that about 20 million pre-sold apartments are still unfinished, leaving a financing gap of about 3 trillion yuan ($414.58 billion).

Lu said Beijing is likely to conduct a nationwide survey of housing projects in the next few months to estimate how much money will be needed to complete construction and deliver homes.

“In our view, restoring home buyers' confidence in the pre-sale system is a prerequisite for a real revival of China's real estate markets,” he said.