Moody's: China property sales to grow modestly as government policies start to work

Moody's Investors Service expects property sales in China to show modest growth over the next 12 months -- after recording a fall in 2014 -- as the effects of supportive monetary and regulatory polices implemented since the second half of 2014 start to gather momentum.

As a result, Moody's is changing its outlook on the sector to stable from negative.

"We expect modest year-over-year growth of 0%-5% in the value of nationwide property sales over the next 12 months to June 2016, compared with a decline of 7.8% in 2014, driven by the policies implemented by the authorities since the second half of 2014," says Kaven Tsang, a Moody's Vice President and Senior Analyst.

"As an indication of this expected improvement, we note that the volume for nationwide sales grew 7.7% year-on-year in April 2015, the first year-on-year rise since November 2013. Furthermore, the growth in volume will moderate the downward pressure on selling prices, resulting in turn from the high level of housing inventory, mainly in low-tier cities," adds Tsang.

"In addition, Moody's is changing its outlook for China's property sector to stable from negative -- which had been effective since May 2014 -- to reflect our improved expectations for the industry's fundamental business conditions over the next 12 months," says Tsang. "Moody's latest forecast also contrasts with its projection in late-2014 of 0% to minus 5% sales growth in 2015."

Tsang was speaking on the release of a Moody's industry outlook on the sector, "Property -- China: Supportive Policies Underpin Modest Sales Growth and Stable Outlook."

The report says that favorable policies that will support sales in the next 12 months include the increased availability of mortgages and reduced down-payments as well as funding costs for buyers who want to finance their second homes with bank mortgages.

Many Chinese home buyers, including both end-users and investors, rely on mortgage loans, so property sales track the availability of these loans from domestic banks.

The banks' lower required reserve ratio since February 2015 should release more liquidity into the market and increase their ability to lend to home buyers and property developers.

Moreover, the three interest-rate cuts implemented by the People's Bank of China since November 2014 will reduce financing costs for buyers who rely on mortgage loans.

Additionally, local governments have eliminated home-purchase restrictions in most of the cities with such restrictions, thereby supporting demand from first-time buyers and upgraders.

In addition, the central government is unlikely to impose new regulatory restrictions because relatively high inventory levels and modest sales growth reduce the risk that prices will rise rapidly, especially in oversupplied lower-tier cities.

At the same time, Moody's says that prices, mainly in lower-tier cities, will remain under pressure during the coming six to 12 months, but the rate of decline will slow from the sharp fall seen in the second half of 2014 because the gap between supply and demand will narrow. But inventory levels will remain above 2013 levels and continue to limit developers' pricing power.

Moody's would consider changing the outlook back to negative if we expect a sustained decline of more than 5% in national contracted sales over the coming 12 months, the nationwide inventory to contracted sales ratio does not decline as expected but instead approaches its recent peak in March 2015, or developers' liquidity deteriorates owing to an interruption in their access to onshore and offshore funding.

By contrast, we would consider changing the outlook to positive if we expect sustainable sales growth of 5%-10% over the coming 12 months, the nationwide inventory to contracted sales ratio trends below 2013 levels, and developers maintain their stable access to various types of funding sources over the coming six to 12 months.