Chinese property prices keep on falling

Existing home prices have fallen faster than new homes, as individual sellers proved more willing to cut prices in a weak market. Existing home prices fell 0.41% m/m in December, in line with the average 0.41% rate of decrease since August, compared with the -0.29% average pace of decline for new homes.

We expect tomorrow’s home sale data to show a fall in sales volume in December, while developer liquidity is still under pressure. The government has announced liquidity support measures for “high-quality” developers, in terms of bank loans, bonds issuance and equity refinancing, and some developers have issued more bonds and obtained more loans. But home sales-related revenue is the most important source of developer funding, and, therefore, a rebound in home sales is critical for developer liquidity too.

The outlook for home sales depends on the Covid situation, and the peak number of daily infections and fever clinic patients has passed for big cities, according to local health authorities. The imminent Chinese New Year period will probably lead to further Covid exit waves, especially in smaller cities and rural areas that have been hitherto unscathed. Secondary waves in the big cities are likely to cause fewer numbers of hospitalisations than the current wave, as immunity should be higher owing to the previous infections.

We think that the general sense of Covid threat will diminish and the economy and home sales will start to recover as early as March.

The PBoC will be monitoring high-frequency indicators like metro activity as well as the financial markets post-Chinese New Year to gauge sentiment. The Bank will also be surveying commercial banks to assess whether credit demand in real economy is reviving after the end-year dip. The new premier will probably announce policy support for consumption, such as promoting electric vehicle and energy efficient appliance sales.

The PBoC has signalled that it stands ready to ease monetary policy if needed. PBoC Deputy Governor Liu Guoqiang said on December 17 that the “intensity” of monetary policy in 2023 cannot be less than it was in 2022, and if necessary, it will be further strengthened. He also held out the possibility of tightening if growth and inflation exceeded expectations. This indicates that the Bank will be flexible and responsive to market and economic conditions, as China makes its way along its exit path from zero-Covid policy.

The PBoC is likely announce lower one-year and five-year LPRs in March or April to boost home sales and private sector credit demand. An MLF rate cut usually, but not always, precedes an LPR cut. The new premier is likely to announce consumption support measures at the National People’s Congress in March, and households are ready to spend, as shown by movie ticket sales in big cities recently. But exports are falling and the property sector is still weak. So, on balance, we reckon policymakers will see the need to boost household and private firm confidence with broad rate cuts.