Housing investments in China likely to drop further in 2016-2017

In recent months, significant improvement has been seen in China’s housing demand and prices. The improvement has been driven by a change in restrictions on home purchases, easing of monetary policy, new ways for home buying to avoid requirements of down payment and lack of alternative investment opportunities.

Demand has been very solid in large cities and is not broad-based as it was in the previous cycles. Prices in Shenzhen have risen almost 60% y/y, whereas in Shanghai the prices have risen over 20% y/y. Prices in T2-cities have increased moderately by 3% y/y, while prices have not yet rebounded in small cities.

However, the situation is not stable, and policies regarding housing are being toughened and not relaxed. Authorities in China have hinted that financial institutions will be banned from giving loans for down payments. This type of activity has already been introduced in Shenzhen. Meanwhile, it has become quite challenging to buy new homes in Shanghai for non-local buyers, while requirements for down payment have been increased.

Moreover, the latest rebound in demand is unlikely to set off a series of new housing projects, according to DNB. However, inventories are still high.

“We therefore continue to expect that starts will decline by around 30% in 2016-17, which is about the same decline as we have seen in the last two years”, added DNB.

Ultimately, this will result in drop in projects under construction, mainly because of less activity in the north, noted DNB. Even if T1 cities are faring well and have inventories at moderate levels, it will not be sufficient to turn the cycle. For the construction cycle, T1 cities have not been much of an importance, and therefore it has not been much of an importance for the nation’s commodity demand either. Therefore, it is quite early to anticipate a recovery in the country’s commodity and machinery imports.