April 4, 2018 / 3:47 AM / 20 days ago

China's home prices expected to rise in 2018 on falling inventories - Reuters poll

BEIJING (Reuters) - China’s home prices are expected to rise faster this year than previously thought thanks to tight supply and government policies that promote smaller cities seeking to lure first-time buyers and upgraders, a Reuters poll showed.

FILE PHOTO: A construction site for residential apartments is seen in Dalian, Liaoning province, China, November 17, 2015. REUTERS/China Daily

But price growth is still expected to be relatively muted - well below the gains made in 2017 - as rising borrowing costs and other curbs are likely restrain the market and pressure developers to accelerate project launches to raise cash.

China’s housing market has enjoyed a more-than-two-year boom, giving a major boost to the economy but also fanning fears of bubbles, prompting authorities to impose measures to stem speculation since 2016.

While more than 100 cities have introduced measures to cool prices, policymakers have been careful not to tap the brakes too hard as real estate has been a major contributor to economic growth.

China aims to pursue “stable and healthy development” of the property market in 2018, protecting the interests of first-time buyers and upgraders while taming speculation, Premier Li Keqiang said in his work report to the annual meeting of parliament in March.

Nationwide, new home prices on average are expected to increase 1.0 percent for the whole year, after rising a median 2.5 percent in the first six months from a year earlier, according to a Reuters poll that surveyed 13 property analysts and economists from March 23 to 30.

“Judging by the government’s macro-prudential policies, prices in the biggest tier-1 and tier-2 cities will remain stable or even tread lower, but it is likely that the rest of China will still enjoy moderate price gains,” said Emily Cao, head of research at Colliers International in Beijing.

A Reuters poll conducted in December found prices were expected to increase a median 2 percent in the first half of 2018 and flatline by end-2018 .

New home prices in 2017 still crept up 5.3 percent from a year earlier, with sales by floor area picking up 7.7 percent, largely driven by a buying frenzy that has spread from the big metropolises to less-regulated smaller centres.

While many expect tightening measures to be gradually extended to smaller cities at risk of overheating, China’s drive to get rid of shanty towns - offering money and resettlement to squatters - may continue to counter cooling demand this year.

Falling inventories after more than two years of strong sales and a constant supply shortage in China’s most populous cities, as well as government price caps, also suggest limited room for prices to fall further, despite the stiff curbs in those markets.

    “From what we’ve seen so far, inventories in most of the cities remain pretty tight,” Dongxing Securities analysts wrote.Inventories in 75 major cities monitored by E-house China R&D Institute fell in March from a year earlier, its latest report showed.

    “Land supply in top-tier cities is still hardly catching up with buyer demand,” wrote analysts at Hwabao Trust.

    Only two of the 13 analysts polled by Reuters expected an actual price fall in 2018. Property investment is estimated to grow 5 percent in the full year of 2018, unchanged from the last poll.

    LIQUIDITY RISKS

    Most analysts polled by Reuters believe Beijing’s crackdown on illegal financing to the property sector is set to intensify this year, and developers in general will face more liquidity pressure as sales cool further and borrowing costs rise.

    In an effort to fend off financial risks, Beijing tightened monetary conditions in 2017 to tackle a growing debt pile, and closed off many grey channels for highly-leveraged developers to raise debt.

    That will also pose what is seen as one of the biggest risks to China’s real estate market - bankruptcies of small and medium-sized developers that could disrupt markets.

    But economists don’t expect any immediate danger, as bigger industry players such as Country Garden (2007.HK) are flush with cash thanks to record sales in 2017, putting them in a strong position to undertake market consolidation.

    Higher borrowing costs also pose a risk for the sector as they will potentially dampen demand, although mortgage rates remain low compared to historic levels, analysts say.

    The average mortgage rates for first-time home buyers edged up to 5.46 percent in February from a year earlier, while it was 5.79 percent for buyers of multiple properties or homeowners buying a new home, according to Rong360.com, a loan provider that tracks bank lending rates.

    Asked to rate the affordability of Chinese housing on a scale of 1 being the cheapest and 10 the most expensive, the median answer was 6, easing from analysts’ estimates of 7 in the last poll.

    Reporting by Yawen Chen, Jenny Su and Elias Glenn; Editing by Eric Meijer

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