China: More policy measures to support the property market

We now expect the pace of property market correction to stabilise in H2.

    The authorities have announced measures to support the property sector today. The loan-to-value (LTV) ratio has been eased for second-home purchases, with the maximum ratio raised to 60% from the previous 30%, according to a circular jointly issued by the People’s Bank of China, the Ministry of Housing and Urban-Rural Development, and the China Banking Regulatory Commission. Moreover, the Ministry of Finance also adjusted the property holding period (from five years to two years) in the 5.5% business tax imposed on properties re-sales by households:

    For normal properties (i.e. construction area less than 140 square meters), the business tax will be waived if the property resale occurs more than two years after the purchase. Previously, at least a five-year holding period was required to be exempt from the tax.

    For luxury properties (i.e. construction area larger than 140 square meters), the tax will be imposed on the net revenue (i.e. resale value minus the purchase cost) if resale occurs more than two years after purchase; if resale occurs within two years, the tax will be imposed on the entire resale value. Again, the time threshold was five years previously.

    These measures are another significant move for the property market following the mortgage policy easing in last September (see China: PBoC loosens credit policy for the property sector, 30 September 2014). This move is largely consistent with our long-standing view that the property sector is the major drag for growth and policy needs to be loosened to avoid any sharp correction in the sector.

    Overall, we believe this is positive for the sector and we now see the pace of property market correction stabilising in H2, with sales and investment growth becoming stable on a year-on-year basis. More specifically,

    Property demand. We believe these measures are positive for housing demand in the short term, especially in top-tier cities (i.e., Beijing, Shanghai, Shenzhen and Guangzhou).

    Property investment and GDP growth. In the short term, the move may not be able to boost investment, which is important for GDP growth forecasts. Property developers will monitor their sales situation before they adjust their investment level, and therefore, we probably will continue to see slower property investment growth in the short term. In the medium term, our property investment growth forecast of 8% this year should face less downside risk. Overall, we maintain our forecast that GDP growth will slow to 6.9% in Q1 2015 from 7.3% in Q4 2014, and to 6.8% for the year of 2015.

    The pace of property market correction. The significant easing could help stabilise the pace of correction in H2 - property sales and investment growth will likely become stable on a year-on-year basis. That said, we do not believe the market will rebound strongly, given the severe over-supply in the large number of tier-3 or 4 cities. We will probably see a divergence between different tiers of cities, with correction likely continuing in small cities.

    We continue to see the need for further across-board monetary policy easing. Property demand may not be automatically boosted by the higher LTV ratio, given the high financing cost and high bank reserve requirement ratio (RRR). We maintain our view of three more interest rates cuts and three more RRR cuts over the remainder of 2015 (see China: Weakening growth confirmed by activity data, 11 March 2015).