China Housing Bulls Stay Positive

With home sales improving and average sales prices skyrocketing, the Chinese property market looks like it is recovering.

With home sales improving and average sales prices skyrocketing, the Chinese property market looks like it is recovering.

That is the view of one investment bank that has strongly encouraged investors to double down on the once-collapsing market that saw prices falling in most major cities, with many bears warning that collapsing manufacturing activity, a cash-strapped middle class, and slowing GDP growth were all causing housing demand to wane. In recent months, the Chinese government has countered those trends by offering more lax credit standards, making home loans more readily available to Chinese consumers and thus causing housing demand to rise.

That has helped sales volumes rise in all tiered cities throughout China, with the gains rising most aggressively in the first-tier cities. Amongst those cities, sales volumes rose 19% year-over-year in the first half of 2015, after sales volumes fell by 14% in 2014. In top second tier cities, sales volumes rose 12%, while low second tier cities saw sales volumes rise by 1%.

“Looking into July, despite weaker sequential sales data, the Y/Y trend for the top-eight cities sales were still strong … hence we believe the decrease in volume should be more driven by seasonality rather than any change in fundamentals or market momentum. We expect strong growth in July on a Y/Y basis to continue,” said the analyst at a large investment bank in a research note.

Rising Values, Prices

Both sales values and average sales prices have seen sharp accelerations in the first half of 2015 throughout China. First tier city sales values rose 46% in the first half of 2015 while average sales prices rose 22% for those same cities in the same period. Top second tier cities saw sales values jump by 18% in the same period and average sales prices rise 5%, and low second-tier city sales values rose 5% while average sales prices rose 4%.

This is leading China bulls to argue that demand for housing is driving volumes and prices up, and a downturn in construction in 2014 has helped prop up prices for the beginning of the year, even as many investors turned to the stock market and away from property for investment returns. “The biggest driver on construction activities has been funding to developers, which in turn, was driven mainly by sales which were weak in 1Q, partially covered by a strong 2Q; hence, we believe that if 3Q is strong, then 4Q construction activities should pick-up,” said an analyst in a report to clients.

Supportive Environment

With strong home prices and an improvement in volumes, some analysts worry that prices are becoming unaffordable or loan-to-value (LTV) ratios are rising to unsustainable levels. However, analysts in China respond that LTVs remain far below levels seen in the U.S. and Western Europe, while debt loads remain very low with plenty of room to grow.

Maximum LTVs for new purchases remains at 60% or less, even after more relaxed lending standards. This is far below the 90% LTV that is customary in much of the U.S.

Additionally, demand for mortgage issuance in the Chinese banking system is strong, and analysts believe this in addition to stimulative monetary policies from the People’s Bank of China will encourage stronger price growth in the housing market in the near term. “Banks are still supportive of housing mortgages, with new grant amounts at record highs in 1Q and 2Q2015,” wrote one analyst in a report, adding that the “macro environment is supportive to the physical market, in our view.”

Home prices have begun rising in most of the largest Chinese cities, with price increases expected to accelerate later in the year.