Chinese Stocks Tumble Most In 4 Months On Latest Government Attempt To Pop Housing Bubble

Chinese Stocks Tumble Most In 4 Months On Latest Government Attempt To Pop Housing Bubble

The last 3 days have seen China’s Shanghai Composite index tumble over 3% – its largest drop since October as sentiment comes under pressure from concerns about tightening in the real estate sector.

The pace of price appreciation has slowed notably – especially ‘existing’ apartment sales (i.e. the speculators are exiting) – as it appears houing demand is cooling off with the number of cities with falling MoM home prices rose to six in January from two in December.

The PBOC has jawboned as much and real estate sector financial condtions are tightening is slowing as a number of banks curb lending to developers. This is weighing on copper prices also as construction activity slows (exacerbating problems in the shadow banking system’s collateral pools). The PBOC is getting what they wanted – but may regret it.

Home price growth moderated further in January (via BofA)

Prices of new commodity homes for 70 medium-to-large-sized cities surveyed by the National Bureau of Statistics (NBS) increased by 0.40% mom in January, same as in December. In yoy terms, average price growth of the 70 cities dropped to 9.5% in Janaury from 9.7% in December.

The number of cities with higher mom home prices was 62 in January, down from 65 in December; while the number of cities with falling mom home prices rose to six in January from two in December. Soufun’s 100-city average new home price index painted a similar picture, with mom growth easing to 0.63% in January from 0.70% in December.  

Secondary market worst hit as construction activity slides (Via SocGen),

China’s January housing price inflation largely unchanged from the previous month for new apartments but softened notably in the second-hand market. Together with the news of loan curbs on the sector, China’s equity market reacted negatively and fell by more than 2%, as property and related stocks led the decline.
…The deceleration was led by first-tier and upper-second-tier cities. Notably, Beijing reported the first decline in second-hand property prices (-0.1%mom) since June 2012, and Shanghai had the lowest second-hand home price inflation since May 2012.

Easing housing inflation serves as another sign that housing demand is cooling off, which argues against further strengthening of construction activity. On top of that, bank lending to the real estate sector seems to have started tightening up, as a number of commercial banks have reportedly suspended lending to developers. The development supports our view that the property market will contribute to investment growth deceleration in 2014.

The bottom line is that the trend in 2013 is not sustainable

In 2013, China had 10% increase in new home prices and 20% growth (floor space) in new home sales. We don’t expect that trend to be sustained. In 2014, we expect average yoy national home price growth to slow to low single digit on tapering pent-up demand and higher housing supply. We also see an growing diversification among cities as urbanization and migrangration create both winners and losers.

Slowing or even falling home prices in some cities can create volatity in fixed asset investment and financial markets, but we think a one-way rise of home prices could be even more negative for China as it invites too much speculation. 

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