China's home prices likely will fall by a further 10 to 20 percent between now and the end of the year, after slipping 5 percent in the first quarter, a Reuters poll showed, enough to slow broader economic growth but not trigger a hard landing.
While such a drop would be hefty by Western standards, and certainly not welcomed by homeowners or banks, it would be coming off a bubbly, 10-fold surge in Chinese home prices in the last decade, and would confirm that a government-engineered cool down of the sector is well under way.
Even though analysts polled in the survey believe Chinese residential property is still expensive, there is no widespread concern about a US-style crash, partly because China has much stricter regulations on mortgage lending and higher down payments are required to buy a home. Moreover, Chinese leaders remain confident enough in the soft-landing economic scenario that outgoing Premier Wen Jiabao is not expected to rollback any current property tightening measures before he officially hands over power early next year.
The Reuters poll of 20 economists and property market analysts, mostly based in China, was taken on April 12-18, before data on Wednesday showed the first year-on-year fall in house prices in two years.
"We are seeing a significant correction in the Chinese property market, but property is still overvalued and still wildly detached from the fundamentals," said Alistair Thornton, a Beijing-based economist at IHS Global Insight. "A 10-20 percent fall from its peak last year is what the government wants to see and brings the market slightly back towards the area it should be," Thornton said.
"I don't think we will see a hard landing, purely because the government retains enough levers of control over the economy and the property market that it can avoid one," Thornton added, noting that tight credit conditions were already easing.
The 2012 price decline of 15-25 percent predicted by most analysts in the latest poll is slightly sharper than the 10-20 percent seen in the last poll in January, when many market watchers believed Beijing would soon ease some of its property measures to shore up domestic demand in the face of cooling global growth. Those hopes were doused in March, when Premier Wen said that home prices remained "far from reasonable levels", though Chinese leaders have offered no definition of what that is.
As such, property market watchers are now more convinced there will be no major changes this year to the government's curbs on property speculation. It is expected to maintain strict down payment requirements of 30 percent for first-home buyers and 60 percent for those buying their second ones, as well as restrictions on the number of homes a family can own. Poll respondents still see Chinese home prices as expensive. On a scale of 1 to 10, where 1 is extremely cheap and 10 is extremely overvalued, the median reply was 7, unchanged from January.
New home prices fell by 0.7 percent in March from a year earlier, the first time since the property tightening battle started two years ago, according to Reuters' calculation of official data published on Wednesday. On a monthly basis, they have been falling since October.
The broader economy is coming off the boil as well as the property market, and also broadly according to government plan. Growth in the first quarter slowed to its weakest pace since the 2008-2009 global financial crisis, although with positives. Some analysts say it might have bottomed for the current down cycle and will start to pick up in the next few months.
Under such a backdrop, the real estate market is still seen as one of the biggest potential threats to the Chinese economy and the country's banks, which are reporting increases in total non-performing loans. Real estate investment was worth about 13 percent of China's gross domestic product in 2011 and the sector directly affects more than 40 industries, making Beijing's campaign to curb rampant property speculation one that has been felt across the economic spectrum. Chinese home prices would fall by another 10-20 percent in April through December, 11 out of the 20 respondents in the poll said. Six expected a fall of less than 10 percent, two projected a slight rise and one said they would be flat.
Half of them estimated that home prices fell 5 percent in the first three months. Among major cities in China where housing statistics are available, prices in highly speculative markets such as Wenzhou, Ordos and Sanya will probably fall the most this year from their peak in 2011, 15 out of 19 respondents said.
The eastern city of Wenzhou, a test bed for China's latest financial reform after reports about local private business failures, suffered the deepest home price decline in the past three months, falling by 9 percent in March, 8 percent in February and 7.6 percent in January, respectively, from year earlier periods, according to the NBS data. The median forecast was for a cumulative fall of between 20-30 percent in these cities from their 2011 peaks. However, one respondent expected a slump of up to 50 percent.
Chinese banks have begun to offer some discounts again on mortgage rates for first-time home buyers, boosting property transactions in recent weeks. Eleven of the 20 respondents expect the pickup in transactions will be sustained.
"The latest pickup reflects pent-up real demand, and was boosted by policy fine-tuning through lower mortgage rates," said Jian Chang, a Barclays economist in Hong Kong. "It is useful to watch for upgrading demand, which will signal a more sustainable recovery in property sales," she said, referring to people buying second homes for self-use as their incomes increase or as their families become bigger.
Eleven respondents said authorities would not cut the required down payment for first-time home buyers in 2012. In January, 15 of 20 respondents expected they would.