China Property Update: Small Positives Today to Become Small Negatives Tomorrow?

by: Econ Grapher

A quick check-in on the Chinese property market shows prices continued to rise in April, but apparently at an increasingly slower pace. According to SouFun/China Real Estate Index System, the average property price across 100 cities rose 0.40% in April to CNY 8,773 per square meter. The results compare to 0.59% in March where property prices rose to 8,738 per square meter. The average price per square meter six months ago was 8,418 Yuan, i.e. average prices are now 355 Yuan higher. For a 100 square meter place this would translate to about a 35,500 Yuan (US$5500) increase in the total purchase price.

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Incomplete and changing datasets aside, it is interesting to see the course of the new "index-to-watch" (given that the authorities decided to abandon the official 70-city index) over the past couple of months. Of course even more interesting will be the course of this index over the next couple of months to see if smaller positives turn to small negatives. And the thing is, small negatives would not be unreasonable given the backdrop...

Monetary policy tightening has continued, and it's likely there will be more in the near term. The required reserve ratio is now at an average 20.5% for large banks, and the policy interest rate is up to 6.31%. But more so, there have been a range of targeted policy moves to address rising house price inflation such as increases in mortgage lending limits, limitations on buying additional houses. There's also the large scale social housing construction plans that may put a damper on the pace of gains in house prices.

So where does this leave the outlook for the Chinese property market, and, by logical extension, China as a whole? Well, there will be some more April property market data out on the 18th of May from the National Statistics Bureau. That's price movements in 70 cities and no, not the index, city-by-city. There's also inflation data out next week, which includes several sub-components that are linked to property e.g. development costs, furnishings/fittings etc, and rental costs [note: rent prices have been surging].

I am forecasting that CPI will be more closer to 5% than the 5.4% in March as food prices have also shown the same pattern of slower increases, but time will tell. If it is above 5% or even higher than March, then the People's Bank of China will almost certainly announce another tightening move.

But back to the property market outlook: It's easy to prattle on about the range of specific measures that the government has undertaken in an effort to crack down on rising prices (and even to reduce prices), and the more general anti-inflation moves of the PBOC in monetary policy. But as for the wider economy, activity is still running pretty hot, so the fundamentals i.e. income, employment, and the running/structural urbanisation theme are still supportive of property prices. But the base case, particularly as the topic becomes more political, should be for some easing in property prices in the near term.

Apparently Homelink reported new home prices in Beijing going from RMB24,945 per square meter in March to RMB22,512 per square meter in April (down about 10%). With secondary market prices only off about -0.2% from RMB19,850 per square meter to RMB19,811. So could this be the early signs of the start of a slowdown in the property sector? Stay tuned if you're interested as I'll be watching this closely and reporting more in-depth over the next few months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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