Chinese Government Takes Hands Off Approach to Real Estate; Sector Will Return to Pre-Stimulus Role in Economy

Key points in the article:

Price cuts are not having the effect of rapidly increasing sales, instead the price cut phenomena is starting to look like dominoes falling. In first tier cities like Beijing, Guangzhou, etc. there are hidden price cuts such as zero down payments.

In Q1, the commercial/residential area sold fell 3.8% yoy; area of residential sales fell 5.2%; residential yuan sales fell 7.7%; sales fell sharply in second- and third-tier cities. According to Centaline, first-tier Hangzhou saw sales volume plunge 94% qoq.

What surprises the public is how calm the central and local governments are in the face of the slowdown. There have been many rumors of government aid, such as in Fujian. One industry insider said maybe the local government's want to aid the industry, but they won't take a step as long as the central government is resolute.

Aside from a previous policy aimed at increasing supply and building affordable housing, the government has not intervened in the market. When prices shot up in 2013, the government said and did nothing. Now prices are coming down, the government has said and done nothing, thus letting the market set prices.

The writers asks, does this mean real estate is moving from a pillar of the economy to an observer?

In 2013, real estate investment contributed 13.6% of GDP growth. This ignores all the industries it helps such as steel, cement and household appliances. Given the urbanization policy and its role in the economy, real estate will not undergo a fundamental change. It will remain a pillar of the economy. But after local governments used real estate to stimulate their economies (post-2008), now there are many stories of ghost cities and indebted governments, real estate has become the pillar of the economic bubble. The government will not travel the old road and instead let the market set rational prices, this will allow real estate to return to its pre-stimulus position as a pillar of the economy.

My comment: Although the media has dubbed price cuts from earlier this year as the first wave, this is only true in some localities. The first widespread wave of price cuts will come when there is widespread recognition that the government is really going to take a hands off approach. Right now, prices have come down a little in many places, but from experience people expect the government to step in or they expect the market will turn up on its own, so prices aren't tumbling— except where there's major oversupply and extremely indebted developers. The government isn't going to act until at least this wave one occurs. Sticking with Elliot waves as an example, there may be a bounce if people think the government will step in at that time and that is when we will really see whether Xi and Li are in control and committed to reform because there will be great pressure to take some action at that time. Wave 3, the big wave that delivers the bulk of the losses, will happen if the government still refuses to intervene.

The article is from Xinhua. If an English version of this story comes out I will substitute it for the Google translation below.

楼市开始出现明显降温迹象 支柱地位会不会动摇 (Clear Signs of Property Slowdown; Will Pillar of the Economy Waver?)

Whether it is frequently heard around the estate discount promotion news, or recently released a quarterly real estate sales and price data, all convey such a signal: high fever in China's property market is finally beginning to show significant signs of cooling. Real estate growth in the face of the stall, the local government's property market deregulation "grapevine" continues, but in the end no city started the "rescue" the first shot. The real estate industry has always been regarded as "an important pillar" of national economic development, while macroeconomic pressure ahead run to re-enter the cycle, the real estate industry will not take up the front line of promoting economic "pillars" again?

Cooling housing market

One after another price cut in the recent Chinese property market is not news. If the developers had little promotional price cuts across the market, do not have too strong for representation, then, the recent domestic real estate enterprises giant Vanke [ Introduction News ] held in Hangzhou, the markdowns seem meaningful.

With lower overall property market in Hangzhou, Vanke multiple projects in Hangzhou recently started a substantial promotional activities, Vanke "We Qiantang House" project launched 52 sets of small apartment decorated lowered standards, compared to the previous sale of units total price from 400,000 to 500,000 yuan discount.

However, low-cost strategy does not return quickly recovered volume, contrary to like pushed to the first domino, followed by more and more cities added to the ranks of markdowns: Changzhou, Ningbo Yingkou, Lianyungang (quotes, interrogation), Qinhuangdao and other places prices have started to show signs of decline. Even the prices firm in Beijing, Guangzhou, Shenzhen and other cities, recently heard some real estate to sell discount "zero down payment" disguised price cuts and other phenomena.

Macroeconomic data also confirms the market changes in wind direction: a quarter of the real estate data from the National Bureau of Statistics show that the national real estate sales area fell by 3.8%, including residential sales fell 5.7 percent; sales fell 5.2 percent, with residential sales decreased significantly, reaching 7.7%. Among them, the second and third tier cities in the volume shrinkage of the most powerful. According to Centaline research statistics, Hangzhou property market in the first quarter of this year, total sales volume in the lower margin reached 94%.

As people are most concerned about housing prices, as early as February this year, 70 cities new commercial housing prices rose year on year for the first time appeared in the ring than double drop since February 2011. National Bureau of Statistics on April 18 released the latest data show that the March 70 cities new commercial housing prices stop rising or falling over the city has reached 14.

Subtle attitude of the Government

Whether the trend is still realistic, cool the property market is evident, however, compared with last year's hot real estate market suddenly decline, more surprising is that the central and local governments in the regulation of real estate issues patience and calm.

With the April 1st quarter release of macroeconomic data, quarterly growth of China's economy to new lows, the economic pressure in the front row of the background, has long been used as an important macro-control "lever" in the real estate market, any policy side The trouble will lead to people's particular attention.

Recent month, accompanied by a cooling property market, more and more "relaxed control" "Exit restriction," the news began to spread among the people. A number of cities including Wenzhou, Changsha, Hangzhou, Fujian were reported execution for four years, "restriction" policy or appeared relaxed, two sets of mortgage money usher resize the window sill or so, "the grapevine." However, they continue to spread the message afterwards almost all gone below. A real estate industry source told reporters, in the face of the real estate market stall, perhaps local governments really have the urge to give the property market deregulation, but as long as the central spiritual unchanged no one dares to act rashly.

For the real estate market regulation policy, the central government-related position described as "Ximorujin." Since last year, the new government has repeatedly emphasized that in addition to increasing housing supply, accelerate the construction of affordable housing and shantytowns outside, almost no direct administrative intervention involving property control, even last year, when prices rose fastest, nor the introduction of any new policies for market regulation. In fact, with this year's two sessions during the "two-way control" of the proposed features of the real estate market regulation has become increasingly apparent.

Maintain the status quo under the existing regulatory framework for real estate, the property market under the background of economic pressure, "inaction" Does that mean that the real estate of this "pillar" industries to play the role of a spectator in the current round of economic cycle as well?

"Pillars" of the status of the return

In fact, as an important pillar industry of the national economy, the real estate industry in the medium to long term investment in fixed assets account for a large proportion - the National Bureau of Statistics show that the contribution of real estate investment to GDP in 2013 was about 13.6%. Moreover, the real estate industry related degree to make a huge iron and steel, cement, household appliances, decoration and so many industries have a decisive influence in the healthy and stable development stage, the real estate industry, has an unusual macroeconomic significance . Especially with the proposed new urbanization and the gradual implementation of the strategy, the real estate industry pillar position will not change fundamentally in the next several years.

However, it is precisely because of these characteristics of the real estate industry, it can easily be used as an entry point to stimulate the economy, stimulating growth in the short term as a rich financial "doping."

Means over a long period of time, the local government quickly stimulate investment and enhance GDP, without exception, are achieved by stimulating the real estate industry. After reaching the short-term economic stimulus, the effect of the expansion of investment, "doping" the frequent use, but also make it increasingly prominent side effect - more and more deserted "ghost town", excessive overdraft land resources, local debt pressure, the extremely high prevalence of speculative and investment prices - turned into a pillar of macroeconomic bubble economy "pillar."

At the time of macroeconomic downward pressure, not easy to introduce policies to stimulate the real estate market, the property market does not relax the established regulatory policy, preferring to bear the cost of bringing the market return to the rational, nor repeat the previous old - in a number of industry experts on these practices is the real estate previous "doping" role gradually pull back "industry-led" original effect, is the real estate "pillars" role-based return.