China’s slowing property market and the impact on economic stability
The China property market has regained investors’ attention as the most important pillar of a recovery story. However, recent data on land sales, property financing, and consumption trends suggest analysts may be too optimistic.
Our views are more pessimistic:
* Weakening property prices, particularly in the poorer Tier 3 and 4 cities reflect tightening of shadow credit which is correlated with T3-4. We expect property prices to continue rising at low-single-digits this year vs. market’s upbeat view of mid-to-high single-digit growth.
* There has been a significant decline in land revenue for many local governments. More than half of local governments lowered their land sales targets. One key leading indicator, land purchase measured by total area, slumped 34.1% YoY in the first two months of 2019. This was the largest decline in land acquisition in the past decade.
* Meanwhile, over the next three years, Chinese property developers will face deteriorating solvency and rising debt repayment. We believe developers are becoming more cautious. This is evident in the shift of interest to the stable T1 and T2 cities, from the weaker, and riskier, T3 and T4 cities.
* A recent survey has indicated that rising property prices have put pressure on consumption. In general, families with higher leverage (monthly mortgage payments as percentage of total income) tend to spend less on consumption of other goods.
* A balancing act – Beijing will be concerned about the rising cost of housing negatively impacting consumption of other household goods. Thus, we don’t expect the government to relax rules on housing purchases, or lower interest rates, as this could further interfere with general consumption trends.
* There is the potential for a fiscal crisis among some local governments that may force Beijing to loosen restraints on shadow lending – in direct contradiction to the past year’s policies.
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