Observations On The Chinese Real Estate Sector Following The Biggest Price Decline In 5 Years
Two days ago we indicated that something quite material could be happening in the Chinese real estate market. Quoting from Market News, we reported that "Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission." And while many dismissed these news as merely a property specific ASP rotation, what followed was a downgrade of the Chinese property sector by Moody's citing an expectation of "credit conditions to worsen in next 12-18 months for developers" at which point we decided to dig in deeper. It appears not all is as good as the apologists would like to claim. Because while the average selling price in Beijing plunged by 34%, and that in Hangzhou by 26%, the drop was very substantial and rather pervasive pretty much everywhere else as well. From Citi's Oscar Choi: "ASP- down 7% MoM in March, biggest monthly drop in the past five years. In January and February, ASP in most key cities still maintained an upward trend. But entering March, ASP achieved in 18 key cities dropped by 7% MoM, and Beijing’s and Hangzhou’s ASP achieved were down 34% MoM, Hangzhou down 26% MoM." Well, it took about a year for the unbelievers (and infinite for Ben Bernanke) to realize that contrary to expectations, subprime was not contained. It will probably take the China apologists the same amount of time to agree that the biggest drop in real estate prices in 5 Years and a 7% countrywide plunge is the beginning of the end for the bubble. And while it is not so much the question of what properties make up the average ASP, or what the high-low priced composition is, the question is what happens next now that highly leveraged speculators are unable to flip properties on a monthly basis, and as a result have to create other bubbles elsewhere.
More from Citi:
We checked with the transaction details in the two cities, and the significant drop in March ASP was due to the change in product mix transacted in the period. For example in Beijing, in March, the number of high-end property units (ASP>RMB30K/sqm) transacted only accounted for 7.4% of total units transacted (25.2% in Feb), while low-end units transacted (ASP<RMB16K/sqm GFA) jumped to 36.5% of total units transacted (Feb of 9.9% only). Most of the other cities had similar situations. Local governments have kept strict pre-sale permit controls for high end projects while they encourage more launches of low-end projects, and the change in product mix should result in an ASP decrease.
In February, due to seasonality factors and the impact of the new tightening measures, most developers recorded a sharp decrease in monthly sales, which was fully expected. The monthly sales in March showed a decent rebound MoM, on average increasing by 36% MoM. But the magnitude of the rebound was weaker than expected, especially as Agile, CRL, Greentown, and Longfor all recorded MoM decreases in March. It is apparent that all of the four developers are focused on the high end, which implies that the high-end residential segment has been suffering more in the tough operating environment. Local governments keep a close eye on ASP and technically manipulate the launch schedule of high-end residential projects.
1Q11 land supply dropped a lot, down 37% QoQ and down 23% YoY. In 1Q, the governments in the top 120 cities released 96.61m sqm of residential land supply into the market, down 37% QoQ and down 23% YoY. As expected, in the first three quarters of 2011, the local governments only have limited land resources to be supplied into the market, in order to first satisfy land demand for social welfare housing construction of 10m units. In 2Q, we expect there will be even less land supply in the market. The land market should enter the winter period in 2Q/3Q.
Expect to hear much more on this matter once the ostriches are forced to pull their heads out of the sand. And, even more importantly, look forward to see what the PBoC's reaction will be should it realize the sector that is that biggest marginal consumer of debt is now in freefall.