China's real estate sales are expected to revive after COVID-19 is subdued. The expected rejuvenation of the property sector is important as real estate constitutes a key part of the economy, and will contribute to the stabilization of macroeconomy.
Although COVID-19 has had a negative impact on the residential property market, various supportive measures launched by the government are expected to bolster the stabilization of sales in the coming months. The downtrend in interest rates, abundant liquidity in the financial system and the sizable scale of social financing are creating a favorable financial ecosystem for the home market to rebound.
As COVID-19 is reined in gradually, it is time to restore those businesses that received a hard blow. The real estate sector is one of them.
After bottoming out in the first quarter, the property market has already experienced a quick rebound in sales to the level of the end of last year.
Latest data from the National Bureau of Statistics showed new home sales in May reached 147 million square meters nationwide, up 9.7 percent from the same period last year. Among the 70 major cities monitored by the NBS, 57 cities saw their new home prices rise, seven more than the previous month. In the pre-owned home market, the number of cities where prices rose increased to 41 from 37 a month ago.
Apparently, the latest recovery in sales has a lot to do with the release of pent-up demand for homes in previous months, which we regarded as spontaneous recovery by the market itself.
With the guideline "homes are for living in, not for speculation" for backdrop, the central government continues its efforts in trimming the economy's heavy reliance on property. So, it's hard to tell whether the incipient revival in home prices will sustain.
There are certain factors that may hold back real estate price revival. Because of COVID-19, Chinese people's incomes have dropped in the short term. At the same time, household debt hit a historic peak. These changes seem to have dampened the outlook for the home market.
But contrary to general perceptions, we can find examples from both China and the United States that a slowdown in income growth may not necessarily lead to subdued home sales.
That's because people's home purchases are mostly based on their savings accumulated over a long period of time and their anticipation of the future. So, if income drops turn out to be short-term in nature, prospective homebuyers would not overturn their decision to buy a home.
Similarly, although Chinese people's income growth may be affected due to COVID-19, we don't think it would constitute an obvious constraint on real estate sales.
We also don't see a direct connection between household debt ratio and the short-term prosperity of the property market. For instance, Chinese people's home purchase leverage ratio has been on the rise for more than a decade, while residential property sales grew steadily during the same period.
It's worth noting that the home purchase leverage ratio generally changes slowly during a short period of time, so it could hardly become a dominant factor that could trigger drastic variation in home sales. Experience in countries including the US also reflects such a characteristic.
So, there are quite a few reasons that allow us to back expectations of a revival in the home property market. Implementation of supportive policies in accordance with each city's conditions is going to be one of the drivers of Chinese real estate market at the moment.
Since the Central Economic Work Conference held in 2016 formulated the principle that "homes are for living in, not for speculation", the central government has been reiterating it from time to time. Local governments keep a close eye on home purchases to maintain stability in the market.
Thus, strict implementation of the central government guidance over the last couple of years has effectively eliminated residential property sales fluctuations across the nation.
In fact, thanks to the tightening of measures by local governments in accordance with their circumstances, 31 second-tier cities' new home and pre-owned residential prices have slowed their growth rate for 13 months in a row. And 35 third-tier cities experienced 14 consecutive months of flat prices or slowing home price growth.
Governments of Shandong province and the city of Nanjing in Jiangsu province eased their measures to allow talented professionals to apply for permanent resident status. There are also cities like Jiaxing in Zhejiang province and Nanning in Guangxi Zhuang autonomous region that relaxed measures relating to the housing provident fund.
Such developments are expected to underpin the rebound in home sales in the future. Going forward, the downtrend in Chinese interbank rates is expected to trickle down to the credit market, and lead to subsequent interest rate changes on home mortgages.
The recent spike in broad money supply and the expansion of social financing will provide a benign financial environment for the real estate market revival.
So, we believe that after a period of spontaneous corrections after the outbreak of COVID-19, there is plenty of room for real estate sales to rally. This is big deal, given the property sector's significance in the larger macroeconomic context.
The writer is a member of the China Finance 40 Forum and chief economist of Changjiang Securities. The China Finance 40 Forum is a non-governmental, non-profit, and professional think tank dedicated to policy research on economics and finance.