Page 20 - CCFA Journal - 8th Issue

经济热点 Economy hotspots 加中金融

Will the property sector see a V-shaped recovery in 2022?
The property sector displayed a V-shaped recovery in 2020, with new home sales (volume) growth slumping to -26.3% y-o-y in
Q1 2020, before rebounding strongly to 12.7% in Q4 2020 thanks to the effective containment of the coronavirus, monetary
easing, and a strong rebound in GDP growth. Will the pattern be repeated this year? After a sharp contraction in the first five
months, some indicators of new home sales surged in mid-June. For example, growth in Wind 30-city new home sales
volumes surged to 43.1% y-o-y on 20 June, on a seven-day moving average basis, spurring market’s expectations for a strong
property recovery in H2.

However, we believe the surge was due mainly to calendar distortions and some abnormal home sales data in large cities.
Shortly after surging to 30-40% y-o-y in mid-June, volume growth in daily new home sales in Wind 30 major cities new home
sales volumes slumped into a deep contraction again in early July, to -44.7% y-o-y during 1-12 July (Figure 6), which was quite
close to the contraction pace of -48.0% in May. We actually sounded a cautious note on the Wind-30 city data in mid-June, as
we viewed the surge as largely driven by some outliers, including Qingdao, and noted that the 30-city sample is overly
represented by large cities (see Will housing vouchers rescue China’s property sector? 24 June 2022). According to a more
reliable data source from the China Real Estate Information Corporation, a leading provider of real estate information, the top
100 developers reported growth in new home sales in volume and value terms of -50.8% y-o-y and -43.0%, respectively, in
June.
Why is a V-shaped recovery of the property market less likely in 2022?

As the property sector started declining in mid-2021, year-over-year growth in major property indices will be bolstered by a
low base in H2 2022. Still, we don’t see a swift and strong recovery of the property sector in H2 2022 due to Beijing's zero-
Covid strategy, Chinese households’ weak confidence, the frontloaded demand of new homes in 2015-18 in low-tier cities,
Beijing’s insistence on keeping some major property curbs due to its political stance, and the vicious cycle of the developers’
credit crunch, stringent controls on escrow accounts, and potential home buyers’ concerns over non delivery of pre-sold
homes.

First, back in 2020, China successfully and quickly contained Covid-19 within its borders at the onset of the global pandemic,
and this provided a cornerstone for the country’s rapid recovery in 2020. Therefore, sizeable pent-up demand was released
and used for home purchases after the initial shock ended. This year it’s different. Compared with previous Covid variants,
especially the original one, Omicron is much more infectious, so achieving zero Covid is way more costly and difficult. As most
other countries have either already shifted to living with Covid or have plans to do so, it will be increasingly challenging for
China to eliminate Covid unless it closes all cross-border travel.

Second, households’ confidence remained generally resilient for much of 2020, as people expected Covid to fade away quickly,
or at least to not make any significant impact on people’s lives in China. But this year is the third year of Covid, many people
are worn out, unemployed or underemployed, and have drained their savings to a level at which they now have to reduce
their spending. Unlike in spring 2020, when there was a general belief that Covid-19 would end in the summer, Chinese
people are now unclear when the ZCS will end. Without the ending in sight, Chinese households and private sector corporates
will very likely cut their investment in homes and capital goods.

Third, the massive property stimulus during 2015-18, which was driven by the pledged supplementary lending (PSL)-backed
cash settlement shantytown renovation program (SRP), front-loaded home demand in many low-tier cities and significantly
increased leverage of many households in those cities. The front-loading during those years makes the easing measures on
the property sector this year much less effective.

Fourth, many of the property curbs rolled out since late 2020 were still there. The imposition of the “three red lines” has led
to massive defaults in the offshore dollar bond market and many developers are now struggling.

Last but certainly not the least, there is a confidence crisis in the property sector due to the perceived high risk of failing to
obtain pre-sold homes on time. Home-buyers now even worry that they may not be able to get their purchased homes
delivered at all due to developers’ bankruptcies. In our view, a vicious cycle has already been formed as households cut or
delay their purchases of new homes on concerns over delivery failures, while private developers’ ability to construct and
deliver new homes is hampered by falling new home sales. Then to add insult to injury, local governments may further step up
their grip on escrow accounts of presale funds, exacerbating the credit crunch of private developers, which account for more
than 80% of the property sector (see China: Beijing may ease tightening on developers’ presale funds, but impact likely to be
limited, 19 January 2022).

CCFA JOURNAL OF FINANCE August 2022
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