While fears of a property crash in China have persisted for much of this decade, the sector appears to be showing signs of a rebound, with sales having appreciated by over 10 percent in April. With quantitative easing taking hold in China, a by-product of this has been relaxed mortgage policies across the housing sector more generally. To provide some context, the latest interest rate cut has resulted in the effective mortgage rate on loans for five years or greater dropping from 5.61% to 5.37%.
However, can China's housing sector continue to thrive when quantitative easing is slowly withdrawn? There are a number of factors that would concern me given a potential rebound on the back of quantitative easing. Firstly, house prices in China are not rising unilaterally. Rather, growth in prices has been concentrated on big cities such as Beijing, Shanghai and Shenzhen. Across smaller cities, prices actually remain quite weak. For instance, Xinhua reports that house prices across smaller cities such as Hefei, Jinan and Changsha showed little if any growth in price.
Moreover, rising prices across the property sector is not necessarily indicative of a full rebound in the sector. Given that prices are rising across the major cities primarily - where land use and scope for construction is more limited, this would suggest that supply remains a central issue - there is simply not enough supply in the main cities to keep up with demand. However, a lack of construction also appears to be prevalent in both the smaller and larger cities - with new constructions for residential and commercial property units falling by 17.3 percent over a 1-year period to 358 million square meters.
Ultimately, lower mortgage rates may be seen as a way to "strike while the iron is hot" for investors looking for a rebound in housing prices across the main Chinese cities. Ultimately, China is facing a situation where investors want to buy but nobody wants to build. This situation will not be sustainable long term, and I would expect that construction would begin to pick up as mortgage demand rises. Failing this, then there is a good possibility that the current pickup in property prices in China may just be short lived.
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