China Rate Cut Halt Home Sales Slide – Financial Chronicle – 27-Nov-2014

November 29, 2014 - Uncategorized

China’s first interest-rate cut since 2012 is set to halt a slide in property sales, reducing developers’ stock of unsold homes that has weighed on prices.

The central bank’s surprise reduction in its benchmark rate on Nov. 21 adds to discounts of as much as 12 percent on mortgages banks are already offering to first-home buyers, according to SouFun Holdings Ltd.

China’s home sales and prices have declined this year after four years of property curbs to stem speculation. Sales slumped 10 percent in the first 10 months from a year earlier and prices fell in all but one of the 70 cities tracked by the government in the past two months.

The rate cut “is a strong catalyst for the China property sector,” said Johnson Hu, Hong Kong-based property analyst at CIMB Securities Research. “Home buyers may see it as a signal of property market stabilization, lifting sentiment and thus boosting home sales and lowering housing inventory.”

The PBOC pared its benchmark for loans longer than five years, on which Chinese banks price their mortgages, by 40 basis points to 6.15 percent.

Lenders’ weighted average mortgage rate climbed 76 basis points over two years, amid higher funding costs and default risks, to 6.96 percent in the third quarter, Essence Securities Co. analysts led by Beijing-based Wan Zhi wrote in a Nov. 24 report.

With the world’s second-largest economy heading for its weakest annual growth since 1990, economists at JPMorgan Chase & Co., Barclays Plc and UBS AG predicted more rate cuts by the People’s Bank of China after regional authorities’ easing of local curbs failed to stem a slide in sales and prices.

More Cuts

“If interest rates are cut a few more times, as is the expectation now in the market, the impact will certainly be bigger,” said Gao Jian, a Shanghai-based analyst at Northeast Securities Co. “Should sales keep rising, prices surely will go up too.”

He predicted single-digit growth in home sales next year.

The PBOC cut is equivalent to about a 2.5 percent reduction on a 1 millionyuan ($162,900) apartment, according to Barclays.

China’s average new-home prices fell 1.9 percent this year through October, according to SouFun, which tracks 100 cities.

The central bank in September made it easier for people to obtain mortgages to stem the slide in property prices. It extended preferential treatment originally available to first-home buyers, including a 30 percent down payment and mortgage-rate discounts of as much as 30 percent, to people buying a second home as long as they’ve paid off existing debts.

Cheaper Mortgages

In the four-year campaign to stem a surge in home prices, the government raised the down payment for second-home buyers to 60 percent and suspended lending to people buying a third property. Many cities also imposed restrictions on the number of homes residents could buy. Most of those measures have been eased or removed this year.

In Beijing, more than half of the banks have started offering discounts of as much as 10 percent on first-home mortgages, according to Bacic & 5i5j Group, the city’s second-biggest realtor for existing homes. Some banks in Qingdao in eastern Shangdong province provided 12 percent reductions, according to SouFun.

Major banks in Shanghai, which are granting discounts of about 5 percent to first-home buyers, are likely to increase them to about 10 percent early next year, CIMB’s Hu said.

Buying Intentions

More than 40 percent of respondents in a SouFun online survey said they would bring forward their home-purchase plans after the central bank’s rate cut, according to results published by the nation’s biggest real estate website owner as of Nov. 24.

Almost 60 percent of the participants in the survey said home prices will rebound in Shanghai after the rate reduction. Prices in the city fell 0.6 percent in October from the previous month and 2 percent from a year earlier, official data show.

“Developers may gradually narrow the price discounts at new launches, or even start to raise prices” in the first quarter of next year, Bocom International Holdings Co.’s Hong Kong-based analystAlfred Lau wrote in a Nov. 24 report.

The rate cut will ease developers’ financing costs, potentially saving them a combined 4.6 billion yuan in annual interest payments, equivalent to 3 percent of the 136 listed homebuilders’ net income this year, according to UBS.

It’s time to overweight property stocks as housing sales may rise 5 percent next year, according to China International Capital Corp.

Vanke, Poly

Developers such as China Vanke Co. (2202), Poly Real Estate Group (600048) Co. and CIFI Holdings (Group) Co. will benefit the most because they focus on residential, mass-market housing and have a higher portion of their total borrowings from domestic banks, according to Moody’s Investors Service.

“The rate cut should spur residential property sales in the next few months in conjunction with the PBOC’s mortgage-policy relaxation” on Sept. 30, Moody’s senior analyst Franco Leung wrote in a report. As mass-market buyers generally rely on mortgage financing, “expectations that borrowing costs will decline will likely encourage them to purchase homes, which will boost sales volumes for developers.” Moody’s expects developers’ sales will likely move closer to their 2014 full-year targets.

Developers should view the PBOC easing as a “good opportunity” to clear inventories rather than raise prices, Haitong International Securities Co.’s Hong Kong-based analyst Hugo Hou wrote in a report on Nov. 24, citing widespread oversupply and uncertainties, including a potential property tax. It’s “time for destocking, not celebrating.”

 

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