BEIJING—Beijing’s housing market is showing signs of improvement from the first half of the year, but sharp gains aren’t likely even with last week’s interest-rate cut, said a senior executive at the country’s largest property developer.
“The market bottomed in June and things are improving,” said Mao Daqing, senior vice president at China Vanke Co. and head of the developer’s Beijing operations. Home resales are improving, and the country’s four biggest banks have indicated that they will offer more favourable mortgage terms for home-buyers, he said.
“But does this mean that the housing market will now see explosive growth or sharp gains?” Mr Mao added. “There aren’t any factors to support that either.”
China cut interest rates late Friday for the first time in more than two years. Analysts say the move will underpin still weak sales of new homes in Beijing and elsewhere in the country. It follows an easing in mortgage rules in September, and a focus on speeding up a trial for the roll out of real-estate investment trusts.
The advent of REITS would provide a new channel for property developers to raise money, as well as another way for people to invest in the sector.
Beijing’s housing market is seen as a barometer of demand in the country’s property market because the nation‘s capital attracts buyers from all over the country. In the first 10 months of the year, housing sales fell 23.3 per cent from a year earlier in terms of floor area, the city’s statistics bureau said.
Beijing is home to the country’s most expensive properties, though prices have eased amid a nationwide property downturn.
The city, where there is fairly strong demand, is one of Vanke’s most important markets, along with other first-tier cities such as Shenzhen, where the company is based, and Shanghai.
Inventories of unsold new homes in Beijing have moderated to 11 months’ worth of sales from a peak of 15-18 months in August, said Mr Mao. He added that while 11 months is far from the five to six months seen when the city’s housing market was at its peak, it is an appropriate level.
On Friday evening, China’s central bank cut the benchmark one-year lending rate by 0.4 percentage point to 5.6 per cent and the one-year deposit rate by 0.25 percentage point to 2.75 per cent.
“This action suggests to us that the authorities have become more concerned about the renewed slowdown in growth momentum,” Nomura economists Rob Subbaraman, Chang Chun Hua and Wendy Chen said in a note. “This is a clear ‘step up’ in the intensity of monetary policy easing and is likely a response to the strong headwinds from the property market correction and the limited potency of previous measures.”
Analysts said the rate cut will help some financially strapped smaller developers by reducing their debt-service costs, though it may not have a long-term impact on the market.
“Developers with a high level of existing domestic loans should benefit,” said Jinsong Du, an analyst at Credit Suisse. But he added that any boost to housing sales may be limited given that people tend to pay off their mortgages quickly in China, making them less sensitive to rate changes.
China’s property market is an important driver of the country’s economic growth, but it shouldn’t be the sole determinant of growth, said Mr Mao. “China’s policy makers under President Xi Jinping ’s leadership understand that there needs to be a change in the structure of the economy,” he said.
One overhaul under way is to steer the economy away from being excessively dependent on investment, especially with mounting evidence that too much housing is being built, and ballooning debt among developers and local governments. According to the International Monetary Fund, over the past 50 years, only four countries have experienced as rapid a build-up of debt as China has during the past five years. The four—Brazil, Ireland, Spain and Sweden—all faced banking crises within three years of their surges in debt.
Banks have become more professional in extending loans to the property sector, said Mr Mao, adding that lenders now generally have staff studying market trends, whereas loans were handed out less carefully in the past. He said regulatory supervision of banks protects the country from a U.S.-style subprime-debt crisis, where home buyers with weak credit profiles obtained loans they couldn’t repay.
But more could be done on the regulatory front in China, Mr Mao said, such as speeding up legislation on REITs and pushing ahead with other equity-based funding for property.
“China needs to open up its capital markets,” he said, adding that having more legal capital-raising channels would reduce the need for developers to turn to shadow lenders. Interest rates in shadow banking are high, and credit may be extended based on family ties rather than professional judgements, said Mr Mao.
Problems with shadow finance in the property market are particularly acute in cities such as Wenzhou, on the coast, and Ordos, in the north, where many poorly planned projects have been rolled out and some companies have halted developments, or abandoned them and fled.