Citi: China's real estate market has a soft landing, and house prices will stabilize in 6-9 months

Wall Street Sights

2024-06-05 18:12Posted on the official account of Shanghai Wall Street

Blockbuster stimulus policies in the real estate sector have been introduced one after another, what is the impact?

Citigroup real estate analyst Griffin Chan and others pointed out in a report released this week that the real estate sector is stabilizing, with the new policy accelerating the soft landing, the health of the industry is improving, the supply of new land is further reduced (hitting a new low since 2008), credit support and continuous destocking are also optimizing the supply and demand structure, and it is expected that house prices will stabilize in 6-9 months.

Policy Strength Highlights Government's 'Strong Resolve'

Citi notes that the recent property policy mix shows a strong sense of determination:

1) Reduce the down payment, and the minimum down payment ratio of housing commercial personal housing loans will be adjusted to no less than 15% for the first set and not less than 25% for the second set. In accordance with the principle of city-specific policies, the city government independently determines the lower limit of the minimum down payment ratio for commercial personal housing loans for the first and second houses in each city under its jurisdiction;

2) Ensure the delivery of pre-sale properties;

3) Limit land supply and optimize the supply and demand structure;

4) Promote the government to purchase stock housing, support the property market, and optimize credit support for family housing purchases.

Regarding the local government's policy of acquiring stock housing, Citi pointed out that the initial size of stock housing purchases is not critical (and can be increased if needed), but it sets a floor to stabilize households' expectations for second-hand housing prices:

In 51 cities, 15 local governments announced the purchase of stock housing, and policy support was upgraded. Local governments can use low-cost loans to buy stock housing from the market and rent it out (yields of 1.5-2%, roughly the same as the cost of financing).

It can increase the velocity of money circulation and provide downside protection for second-hand housing prices, which is better than the People's Bank of China injecting liquidity for specific purposes through OMO.

Citi expects the proceeds to flow into real estate companies to support the operations of real estate companies, but the pace of recovery will still depend on household leverage.

Looking ahead, Citi pointed out that the supply of land is still decreasing. After last year's 15-year low, land supply fell by 18% year-on-year in the first quarter of this year.

The bank believes that China's property market can stabilize in 6-9 months, and this stability is good for the performance of the overall market (not just real estate stocks). Given the clear determination of the top management to stabilize the sector, reverse policies across the board, and provide more support for individual property developers to deliver, Citi suggests that investors' attitudes towards the Chinese market can shift to neutral to optimistic.

In March, before the policy was introduced, the second-hand housing market had initially shown signs of stabilization

Citi found that from the perspective of the second-hand housing market, second-hand housing prices have shown signs of stabilization since March 24, before the policy was introduced, and the new policy mix in May further mitigated the downside risks of the new housing market:

1) The second-hand housing market had strong transaction volume in the second quarter, hitting a new high from March to May.

2) Second-hand housing prices began to decline on February 24, and there are initial signs of stabilization.

3) New home sales were mixed, but after the policy package was released at the end of May, new home sales showed a more modest year-on-year decline from the low base in the second quarter;

New supply is dwindling and total inventories remain high

Last month, the General Office of the Ministry of Natural Resources issued the "Notice on Doing a Good Job in the Supply of Residential Land in 2024", requiring that the transfer of new commercial residential land should be suspended if the de-conversion period exceeds 36 months, and the cities with a de-conversion period of 18 months (exclusive) to 36 months should "revitalize and supply".

Analysts highlight that months of inventory and second-hand home transactions are important indicators to judge when prices have bottomed, and the current situation points to an optimistic outlook:

The supply of new residential land in 2023 reached a 15-year low, while the inventory of new homes was 28 months based on a 6-month average of sales, and the inventory of second-hand homes fell to 21 months, and after falling prices, the number of transactions was strong, outpacing the number of listings.

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