China cooling property market is new economic growth threat

The risk of a sharp property downturn threatens to derail an economy that’s gaining momentum

16:19 October 13, 2016

Shanghai: Actions by China’s policymakers to rein in property prices in the bubble-prone nation may prove so effective that the economy’s growth rate could be affected next year.

At least 21 cities have introduced purchase restrictions and toughened mortgage lending since late September, reversing two years of easing to support home buyers. Goldman Sachs Group Inc says more tightening is likely to follow if prices keep soaring, while Citigroup Inc estimates shrinking demand may lead sales volume to contract in the fourth quarter.

“This is a round of substantial and high-profile property tightening, whose national impacts should not be underestimated,” Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc in Singapore, wrote in a report. “A full-fledged property downturn will bring significant downward pressures on the real economy” and increase the potential for a hard-landing, he said.

The risk of a sharp property downturn threatens to derail an economy that’s gaining momentum after reports that have shown improvement in manufacturing, new lending, industrial output, fixed assets investment and retail sales. Underscoring headwinds confronting the world’s second-largest economy, data Thursday showed exports dropped the most since February as global demand remained tepid.

Hu expects 6.6 per cent growth next year, in line with projections in a Bloomberg survey of economists, but adds that risks are increasing. “Every 10 per cent drop in national property sales and construction activities will lead to 2.5-3 per cent drop in GDP, of which 0.5-0.6 per cent would come from first-tier and leading second-tier cities,” he replied in email.

Larry Hu, head of China economics at Macquarie Securities Ltd in Hong Kong, has a similar view. He expects economic growth to drop by 0.5 per cent in the first half of 2017 due to property tightening, at which time he says policymakers are likely to step in to ease monetary and fiscal policy to support growth.

With the economy stabilising for now, policymakers do have some buffer to step up the reforms including easing housing inventories and reining in corporate debt. On Monday, China released a multi-agency plan to reduce corporate debt while saying that the government won’t bear the final responsibility for borrowing by companies, in a sign that they’re intensifying their fight against excessive leverage.

Healthy, sustainable

A day later, Premier Li Keqiang told an audience at a conference in Macau that the government will take effective measures to ensure a “healthy and sustainable” development of the property market. He also said he’s confident that no systemic financial risk will occur.

Not everyone is so confident. The International Monetary Fund has been among those to warn of the potential threat China’s growing debt pile may pose to the banking system and global growth.

Wei Yao, the China economist at Societe Generale SA in Paris, projected overall economic growth to lose momentum in the first half of 2017, as home sales will likely shrink as much as 20 per cent nationwide in the next six months and further damp real estate investments.

Renewed drag

“The sharp rise in property prices over the past year, fuelled by a surge in mortgage lending, is clearly not sustainable and we expect a correction before long,” Julian Evans-Pritchard, economist at Capital Economics in Singapore, wrote in a note. “This may not be the threat to financial stability that many fear. But it will result in a renewed drag on economic growth.”

The Tsinghua UnionPay Advisors Real Estate Index showed property purchases accelerated 47 per cent year-on-year in September, versus an 11 per cent gain in August. The indexes are track transactions handled by China UnionPay Co, the nation’s dominant payment network.

The latest official data show property prices rose by the most in six years in August. While gains have been most apparent in large cities such as Shenzhen, where home prices are up about 60 per cent in the past year, smaller cities such as Xiamen have also seen red-hot growth, with prices jumping more than 38 per cent.

Beijing, Shenzhen

That’s resulted in cities nationwide clamping down with curbs to cool buyer demand. Beijing on September 30 increased down-payments for first-time home buyers to a minimum 35 per cent, the highest level among the biggest cities. Shenzhen’s measures include a minimum 70 per cent down-payment for second properties and restrictions on non-residents.

Meanwhile, financial regulators plan to further tighten control on funds flowing into the property market in violation of current rules, people familiar with the matter said this week. And the Ministry of Housing and Urban-Rural Development has ordered local regulators to intensify probes into rumour-mongering and “malicious” advertisements which play up rising housing prices, saying it was disrupting the market, according to a statement on the ministry’s website.

The curbs are having their intended effect in some cities. Transactions in Beijing plunged 86 per cent and prices dropped 24 per cent in the seven days ended Oct. 9, according to Soufun Holdings Ltd., the owner of China’s biggest property website. In Shanghai, the number of home sales declined 35 per cent in the same period, with average prices down 8 per cent.

Alan Jin, a Hong-Kong based property analyst at Mizuho Securities Asia Ltd. projected that September will mark the “peak” for both home-buying volumes and price appreciation, followed by a year-long decline in volume starting March or April and a decline in the nation’s average home prices beginning in the middle of next year.

“The fierce tightening made by local municipalities are likely under the direction of the central government,” Jin said. “The easing is officially over.”