Reality check for realty sector

Housing prices slumped further in China in May with more homebuyers preferring to stay on the sidelines in anticipation of a further drop in prices.

The number of cities that experienced a month-on-month price decline surged to 35 in May, compared with only eight in April, according to data released by the National Bureau of Statistics on Wednesday. Only 15 out of the 70 cities monitored by the NBS saw a higher price over April, compared with 44 in April.

On a year-on-year basis, Wenzhou was the only city that reported lower prices in May from a year earlier, but still at the same level as in April. The largest gain was about 11.3 percent, down from 13.6 percent in April.

Prices in large cities also cooled. Among the four tier-one cities, only Beijing recorded a month-on-month rise of 0.2 percent, while Shanghai posted a 0.3 percent decline, Shenzhen a 0.2 percent fall and Guangzhou barely changed, according to the NBS.

Yan Yuejin, an analyst with the Shanghai-based E-house China R& D Institute, said the realty downturn in smaller cities contributed to the price cooling in bigger cities. "The wait-and-see" sentiment was strong among prospective homebuyers and this in turn hit home sales," he said.

Home sales nationwide dropped by 9.2 percent during the first five months, against the same period a year ago, according to NBS data. In Beijing, home sales slumped 34.9 percent on a year-on-year basis during the period.

Huang Xiaoyun, general manager of the Shanghai unit of E-house (China) Holdings Ltd, a real estate services company, said the supply-demand gap widened in May, citing figures from the 90 residential projects that he oversees in Shanghai.

"Prices are still subdued. I've never seen developers openly advertising 5 percent price cuts," he said. "Buyers are also becoming more tough in bargaining. Some buyers are not even keen on property visits, unless the prices are reduced by 5 to 10 percent."

Although sales have slumped, property prices have not retreated that much in large cities. While developers have adopted several strategies, it has had a limited effect on overall sales, Huang said.

Even so, data from E-house China R& D Institute showed that prices of newly sold homes in the four major cities rose 3.7 percent month-on-month in May to 23,072 yuan ($3,690) per square meter. Prices in Shanghai climbed 6.6 percent, while in Guangzhou they rose by 14.4 percent.

The stark contrast with the NBS data is because E-house tracks newly sold homes while the NBS tracks fixed residential projects regardless of whether they have been sold or not, E-house said.

Min Yuansong, co-president of Future Holding Inc, a real estate development and commercial brokerage firm, said that developers are facing acute cash flow problems, as borrowing costs have surged and buyers have to wait several months for mortgages.

"In some third－or fourth-tier cities, developers are unable to bear the funding pressures," Min said.

Su Xuejing, executive managing director of China Securities Co Ltd, said from the capital market perspective, developers cannot press ahead with the high-leveraging strategy, as the tight monetary environment makes leveraging unappealing to investors. It will also prompt investors to sell their shares, Su said.

From a macroeconomic perspective, the property industry is seen as too big to fail. The sector accounts for more than 15 percent of China's GDP and directly impacts around 40 other business sectors. Any further fallout would exacerbate the already slowing economy, experts said.

In May, the central bank urged the nation's big lenders to accelerate the mortgage approval process, to spur first-time homebuyers. But the government has refrained from broad-based easing of property restrictions imposed over the last four years to rein in prices.

Yang Hongxu, vice-president of E-house China R& D Institute, said the central bank's instructions have not been implemented in earnest by the lenders, who seem to be rather wary of such moves.

Tang Jianwei, an economist with Bank of Communications Ltd, however, feels that a certain degree of price correction is necessary for the good health of the industry. The bottom line for the government should be to ensure that the correction is not sharp enough to trigger systemic financial risks.

Analysts believe that more monetary policy easing and the removal of curbs on multiple house purchases are necessary to remove the current slack.

"Demand is still strong, but buyers are cautious. The sagging property market is like a volcano that is ready to erupt," Yan said, adding the next trigger point for the sector would come in September and October, the traditional busy season. "More impatient buyers are likely to buy then, thereby lifting sales and prices."

Based on historic data, Yang feels that property downward cycles are always shorter than upward cycles. Given the higher inventory and tighter monetary environment the current downward cycle may last about eight months. This will be followed by an average price correction of around 5 percent before prices start heading north again.