JPMorgan Econ FI-China housing The time inconsistency issues persist LPR cut...-109867124
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Asia Pacific Economic Research
15 August 2024
JPMORGAN
www.jpmorganmarkets.com
Emerging Markets Asia, Economic
and Policy Research
Tingting Ge
(852) 2800-0143
tingting.ge@jpmorgan.com
Haibin Zhu
(852) 2800-7039
haibin.zhu@jpmorgan.com
Grace Ng
(852) 2800-7002
grace.h.ng@jpmorgan.com
Ji Yan
(852) 2800-7673
ji.yan@jpmorgan.com
JPMorgan Chase Bank, N.A., Hong Kong Branch
China’s housing strategy continues its gradualist approach ... China’s goal of
curbing real estate as a key growth driver and raising housing affordability can be
underscored by the CPC’s new objectives of delivering both higher quality growth
and common prosperity. Although the housing market is undergoing its most
severe downturn in three decades, the policy adjustment has been continuing the
gradualist approach. The latest move is a 10bp reduction for the 5-year LPR in July
following the 7-day reverse repo rate cut. While the PBOC has removed floors for
mortgage rates (previously LPR-20bps for first home and LPR+20bps for second
home), the LPR cut suggests room to further lower mortgage rates. However, the
impact of increasing housing affordability (e.g. lowing monthly repayment by
around 1% for 1mn yuan mortgage with 30 year tenure) and lifting home sales will
be relatively limited. In the July Politburo meeting, the narrative around housing
policy guidelines remains largely unchanged, reiterating to support de-stocking of
housing inventory, ensure home delivery, and accelerate the formation of a new
housing market model. But no concrete policy action plan was mentioned, and it
seems policymakers are still behaving in a “just-enough” mode.
… which has created two major time inconsistency problems. First, slowing
the price adjustment to protect household net worth has prolonged the
quantity adjustment … Since the start of current housing downturn cycle, the
Chinese government has chosen to dampen the price decline and let the quantity
do most of the adjustment. It reflects the dilemma authorities face in that a sharper
price decline would improve affordability for new home buyers and achieve a key
pillar of “common prosperity”, but it would damage the net wealth of existing
homeowners, a vast majority of whom are urban middle class with around 60% of
their wealth tied to real estate. Compared to the 2021 peak, new home starts (in
floor space) contracted 65% as of July, and new home sales dropped 52%.
But the price correction has been significantly shallower. The NBS 70 cities’ new
home prices were down 5.3%oya or 0.6%m/m nsa, and secondary home prices
were down 8.2%oya or 0.8%m/m nsa in July. It follows the 4.9%oya or 0.7%m/m
nsa, and secondary home prices were down 7.9%oya or 0.9%m/m nsa in June.
Compared to the previous month, new home prices declined in 66 cities in July (vs
64 cities in June), increased in 2 cities (vs 4 cities in June), and stayed unchanged
in the remaining two cities. With that, new home prices declined 7.7% compared
to the 2021 peak as of July, and secondary home prices dropped 13.9%.
As sufficient price adjustment is still absent, fears of further future price decline
remain entrenched. As in other asset markets, unless the market believes that prices
have bottomed out and even overshot the adjustment, demand rarely recovers
meaningfully. In such circumstances, the impact of regulatory or credit easing is
blunted – as is happening now. There was a temporary home sales recovery in June,
benefitting from both the May-17 demand-side policy easing and mid-year
seasonality. Renewed weakness emerged in both new home and secondary home
sales, as momentum started to fade in July, and decelerated further entering August
based on our high frequency tracking.
See page 4 for analyst certification and important disclosures.
China housing: The time
inconsistency issues persist
LPR cut, mild price fall, elevated real estate FAI drop
2
Tingting Ge (852) 2800-0143
tingting.ge@jpmorgan.com
JPMorgan Chase Bank, N.A., Hong Kong Branch
Haibin Zhu (852) 2800-7039
haibin.zhu@jpmorgan.com
Grace Ng (852) 2800-7002
grace.h.ng@jpmorgan.com
Ji Yan (852) 2800-7673
ji.yan@jpmorgan.com
Asia Pacific Economic Research
China housing: The time
inconsistency issues persist
15 August 2024
JPMORGAN
40
60
80
100
120
140
160
180
200
11 12 13 14 15 16 17 18 19 20 21 22 23 24
New home sold
new home started
Secondary home price
China housing indicators
Source: NBS, J.P. Morgan
2010 Dec=100
0
20
40
60
80
100-20
-10
0
10
20
30
40
50
60
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Index, in reverse order
Housing policy and housing market activity
Index
Housing market
activity index
Housing policy index
Source: NBS; J.P. Morgan; Note: Preliminary estimates for Jul 2024 housing market activity
index with tentative assumptions for land sales growth.
… second, the housing drag on growth remains elevated, which cannot be offset by
replacement drivers such as high-end manufacturing. With continued cash flow pressure
and low incentive to purchase land and start new projects, real estate FAI contraction
remained elevated, down 10.8%oya in July. Compared to the 2021 peak, real estate FAI has
declined by 31%. The share of real estate in total investment dropped from 14.0% of GDP
in 2020 to 9.2% in 1H24, and that of real estate and construction in GDP fell from 14.4% to
11.9%. Just the decline in real-estate investment reduced GDP growth by 1.2-1.4%-pts each
year in 2022 and 2023. The growth driver rotation from real estate to high-end manufacturing
requires credit-fueled policy support, but it turns out running into geopolitical risks (e.g. US-
China technology decoupling) and sentiment shock. As reflected in the latest credit report,
the first negative CNY loan on record is partly attributable to weak investor confidence in
general, due to a challenging business environment, deflationary concerns, and an uncertain
economic outlook. The real estate sector and overall economy are still in a self-reinforcing
downward spiral: housing dragged down growth, and without any material signs of the
economy recovering, housing demand languished, reinforcing the shrinkage of real estate.
We continue to call for a comprehensive resolution, everything and everywhere all at
once, but visibility for it to happen in the near term is still low. Our view has been that the
adjustment needs to be completed early through a comprehensive strategy, such as a large-
scale real estate stability fund to address funding stresses for developers, a central
government led funding package to support private housing de-stocking and public housing
development, and full removal of home purchase restrictions. The recently concluded 3rd
Plenum made some headway on Hukou and rural land reform, but a concrete reform plan is
awaited. We do not expect a major shift from the calibrated approach in the near term. The
renewed weakness in housing activity may trigger additional housing policy relaxation, e.g.,
further relaxation in home purchase restrictions in tier-1 cities and fiscal support (reduction
of stamp duty or value-added tax). Progress of the 300bn yuan relending facility to reduce
housing inventory has been slow as the incentive is weak for all the parties involved
(developers are not willing to offer large price discounts, the project return or rental yield is
not high enough to attract local SOEs). Making better use of the relending facility may require
interest rate subsidy from the fiscal authority or the central bank. As such, we think China’s
housing sector will likely remain a drag on economic growth in 2024, at another 1.2-1.4%pts,
followed by a gradual stabilization in 2025.
3
Tingting Ge (852) 2800-0143
tingting.ge@jpmorgan.com
JPMorgan Chase Bank, N.A., Hong Kong Branch
Haibin Zhu (852) 2800-7039
haibin.zhu@jpmorgan.com
Grace Ng (852) 2800-7002
grace.h.ng@jpmorgan.com
Ji Yan (852) 2800-7673
ji.yan@jpmorgan.com
Asia Pacific Economic Research
15 August 2024
JPMORGAN
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
0
10
20
30
40
50
60
70
Jan 18 Jan 19 Jan 20 Jan 21 Jan 22 Jan 23 Jan 24
China: 70-city property price Increased Unchanged
Declined Growth (rhs)
Source: NBS, J.P. Morgan
No. of cities %m/m
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
0
10
20
30
40
50
60
70
11 12 13 14 15 16 17 18 19 20 21 22 23 24
China secondary home price
Source: Centaline, NBS, J.P. Morgan
Index
NBS 70-city secondary
home price
Centaline tier-1 cities’
asking price index
%m/m nsa
0
150
300
450
600
750
900
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2019 2020-21avg 2022
2023 2024
Thousand sqm, 7dma
Housing transactions by sqm in 30 major cities
Source: Wind, J.P. Morgan
0
50
100
150
200
250
300
350
400
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2019 2020 2021
2022 2023 2024
Source: Wind, J.P. Morgan
Secondary housing transactions in 8 major cities
Avg unit, 7dma
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