China property: why an uptick in Beijing, Shanghai home sales is unlikely to last

A month after China’s local governments unveiled their latest measures to ease home purchase restrictions and boost demand, the country’s two largest cities have seen an uptick in the number of homes sold.

However, analysts said that this trend is far from sustainable, as demand is being weighed down by persistently low homebuyer confidence and expectations that home prices could drop even further.

Beijing and Shanghai issued their latest round of support measures last December to shore up confidence. The measures, which included cuts to down payments and extensions of mortgage repayment deadlines, seem to have yielded solid results. Home purchase sentiment, as measured by the number of new and pre-owned homes sold, rose 3 basis points month on month in Beijing and 7 basis points in Shanghai, according to a January report published by China Index Academy, a real estate research firm.

The transactions of new homes in Beijing jumped 38.5 per cent year on year to 6,106 units in December, bringing the total volume of new homes sold across the city to 66,000 units, or 74.9 million square metres. Meanwhile, new home prices rose by 0.17 per cent year on year and the prices of pre-owned homes dropped by 0.63 per cent in the same period.

The impact of the easing measures in Shanghai has been more modest, with new home sales expanding by 2.4 per cent year on year, while prices rose by 0.25 per cent. The sales of pre-owned homes grew by 9.4 per cent year on year, while prices fell by 0.8 per cent, according to the report.

An increase in new home sales was driven mainly by improved supply, instead of demand, said Chen Wenjing, director of market research at China Index Academy. “Overall, residents are still quite cautious about buying homes, and as the market enters into its off-season in January, sentiment will fall even more,” he said.

Wang Xingping, senior analyst of companies at Fitch Bohua, a subsidiary of Fitch Ratings, said the growing sales figures were linked to more quality listings entering the market and selling at higher price points, and were in no way indicative of a broad-based recovery in new home prices.

“Unless there is substantial improvement in buyer confidence, we do not think the trend of price increases will continue,” she said.

The pre-owned housing market is faced with even greater headwinds, analysts said, as second-hand homes usually have longer transaction cycles, and the imbalance between supply and demand in the second-hand homes market is more pronounced.

“Pre-owned homes are already hard to sell,” Chen said. “This, coupled with the fact that expectations of household incomes are still shaky, and homebuyers are hesitant to increase leverage [to buy homes], is putting a dent in demand.”

Gary Ng, a senior economist at French investment bank Natixis, said it takes time for policy support to translate into improved confidence, which, at the moment, is dampened by lower inflation.

“Developers would have greater incentive to sell as quickly as they can, and home prices will most likely flirt with deflation in the next few months,” he said.

Home prices in 70 Chinese cities fell at their fastest pace in almost nine years in December, dropping 0.4 per cent month on month, compared to 0.3 per cent in November, according to data from the National Bureau of Statistics.

Gao Yueqiu, a manufacturing industry professional living in the eastern coastal province of Shandong, said that she is interested in buying a flat for her daughter who lives and works in Beijing, but is facing many challenges.

“One of the main ones is permanent residency, which grants individuals or households the right to buy a home in a given city,” she said. “In order for someone who was not born in Beijing to buy property in the city, they need to at least have a work residence permit, which is not very easy to get.”

When asked about the effectiveness of the easing measures, Gao said the rules were “generally positive” for homebuyers and for Beijing’s property market, but she expects prices to keep dropping for a while.

“After all, there is too much inventory, and the population keeps falling … That said, if you put your money in the bank, you’re still losing money. The economy is bad and people have no place to invest their money, so placing your bet on Beijing’s property might not be such a bad idea.”

China’s latest economic data released on January 17 shows the country’s gross domestic product expanded by 5.2 per cent year on year in 2023, beating the official target of 5 per cent. However, property remained the biggest drag on the economy, with property investment and new home sales falling by 9.6 per cent and 6 per cent, respectively. The nationwide jobless rate also widened to 5.1 per cent in December, compared to 5 per cent in November.

“The top priority for the government … in 2024 is the stabilisation of the Chinese economy,” said Alfredo Montufar-Helu, head of the China Center for Economics and Business at the Conference Board, a global non-profit think tank.

“Last year’s Central Economic Work Conference [CEWC] made it clear that the government will maintain a targeted and measured approach towards its stimulus measures to support growth as necessary, but without exacerbating systemic risks.

“With respect to the property sector, the mantra that ‘houses are for living in, not for speculation’ was not included in the official CEWC readout. In our view, this suggests that authorities are likely preparing to implement a range of targeted stimulus measures to help the sector bottom out from its current downturn and stabilise, which we believe is imperative for confidence levels to improve.”

China Index Academy’s Chen said that local governments could roll out more demand-side measures this year, including relaxing purchase restrictions on a “district-specific basis” in China’s first-tier cities, as well as providing subsidies to residents of lower-tier cities to encourage purchases.