Conclusion: Just as Chinese officials intended, both supply and demand trends are going the wrong direction as it relates to the price of real estate in China. While we don’t think the PBOC will cut its benchmark interest rates in the immediate-term, we do think these data points are supportive of continued consensus speculation around monetary easing in China and could lead to additional RRR cuts over the next quarter or so. Even still, domestic monetary easing will have a highly disappointing effect on stimulating Chinese growth absent a removal of the curbs on real estate activity.
In JAN, Chinese residential real estate prices posted their worst performance in at least a year, with 48 of 70 cities declining MoM and 22 cities holding flat. For commercial buildings, the number of cities posting MoM price gains came in at 5; 11 held flat and 54 cities declined MoM.
JAN ‘12 marked the start of the second year of China’s discombobulated official national price reporting due to the National Development and Reform Commission’s nation-wide index terminating in DEC ’10. Since then, investors have had to rely largely upon the sale price data from the transactions of large developers – entities who may or may not be incentivized to “put their best foot forward”, so to speak (akin to data from our own National Association of Realtors).
So in the absence of what we’d deem as totally reliable data, we’ve taken advantage of the latest supply & demand data points to form an educated view of China’s property market, which, as we have shown in previous notes, is the largest driver of Chinese, and, by extension, global growth.
In the JAN-FEB period, the growth rate of completed supply accelerated to an all-time high of +45.2% YoY as seen in the Floor Space of Buildings Completed series. From a pending supply perspective, growth in Floor Space of Buildings Under Construction accelerated to +35.5% YoY in the JAN-FEB period – good for the second-highest rate on record. The State Council’s goal of building 36 million units of affordable housing from 2011-2015 is a key policy initiative affecting the underlying trends in supply.
From a demand perspective, growth in Total Sales of Buildings slowed in JAN-FEB to an all-time low rate of -20.9% YoY. Moreover, growth in Floor Space of Buildings Sold and Purchases of Land have each slowed to multi-year lows of -16% YoY and -0.5% YoY, respectively.
Looking at the investment climate, the one positive data point we’d highlight is that growth in domestic financing for real estate investment accelerated to +16.3% YoY in JAN-FEB, which is the fastest rate of growth since NOV ’10. That said, however, China Economic Network’s Real Estate Climate Index ticked down to a 32-month low of 97.89 in the JAN-FEB period; the index’s YoY growth rate of -4.9% is the slowest rate since JUN ’09.
With supply increasing at much higher rate than any measure of demand, continued price declines seem likely and, in fact, may be poised to accelerate. Our financials team, led by Josh Steiner, has shown that demand leads U.S. housing prices by one full year. While certainly not an apples-to-apples case study, one would expect Chinese property prices to continue trending lower throughout 2012 given the current supply and demand setup.
From a policy perspective, we believe the current trends will prove supportive for continued speculation around monetary easing in China. While we certainly don’t see any reason for the PBOC to suddenly abandon ship and cut rates aggressively in response to this data (the State Council and PBOC have been explicitly trying to deflate housing prices and slow real estate speculation for two full years), it does lend credence to the view that conditions on the ground in China are, in fact, threatening enough to support near-consensus expectations of a full-scale rate cutting cycle.
Again, given the stated and oft-reiterated policy objectives, it remains our view that China isn’t as close to lowering its benchmark policy rates as a great many investors would like; that said, however, we would expect continued action on the RRR front ahead of any material easing. Most importantly, we continue to hold the belief that, until Chinese policymakers actually lift the property market curbs, domestic monetary easing will have a highly disappointing effect on stimulating Chinese growth.