Why China's property slowdown isn't so scary: Goldman
China's property market looks to be on shaky ground with home sales flagging and prices declining, but Goldman Sachs isn't fretting about a sharp downturn in the sector.
"Our bottom line is that the Chinese housing market has some clear signs of 'froth'," Andrew Tilton and Hui Shan, economists at the bank, wrote in note. "But with several sources of pent-up demand, policymakers have a broad array of tools to deploy (and have even started to deploy some) to help support the housing market," they said.
The bubble in the housing market has been generated more from the supply side – overbuilding by developers— rather than the demand side whereby households leverage up to purchase beyond their means, Tilton and Shan said.
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This means there is still scope to stimulate demand should policymakers desire to do so, they said, noting that rapidly-rising incomes and continued urbanization ensure a large pool of potential buyers in the country.
"Chinese policymakers are attentive to the risks and can avail themselves of a particularly broad array of tools to smooth the adjustment path and limit risks," they said.
Plenty of policy tools
In late-September, policymakers took bold steps to prop up the housing market, allowing a broader range of home buyers access to lower down payments and mortgage rates.
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There's further scope to ease mortgage lending conditions, the bank said.
"The mortgage debt-to-GDP ratio is still low in China, so easing mortgage credit would be highly likely to increase sales, prices and construction activity, with minimal incremental financial stability risk," it said.
Alternatively, the government could provide liquidity to distressed developers or even purchasing inventory directly in order to prevent them from cutting price aggressively to liquidity inventories.
However, the bank acknowledges that managing the property slowdown won't be an easy task.
"Policy must be restrictive enough to rein in shadow banking activity and limit future excesses in construction. But it must be loose enough to support demand and avoid a sharp credit crunch that could lead to liquidation of housing inventory and large price declines," Tilton and Shan said.
"Compared with the previous two housing slowdowns in 2008-09 and 2011-12, debt is higher and growth is slower, so policymakers face more constraints today in designing and implementing effective policy changes to steer the housing market away from an eventual hard landing," they added.
The housing sector – which is linked to some 40 sectors in the country from cement to furniture – is regarded as the weakest link in the world's second-largest economy.
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Growth in real estate investment slowed to 12.5 percent in the first nine months of 2014, from 13.2 percent in the first eight months, while property sales and new construction tumbled, helping to drag broader economic growth to a near six-year low in the third quarter.
"We expect the contribution of housing activity to real GDP growth to wane significantly by 2015, although it is still a net positive," Tilton and Shan said.
"Spillovers to the financial system will not have large negative consequences, because of low household leverage, the lack of complex financial products that can amplify systemic risk, and policymakers' demonstrated ability and willingness to limit the degree of credit stress on the system and to support key institutions," they said.
Near-term outlook brightening
Alvin Wong, China property analyst at Barclays, expects the government's recently announced property measures will begin to boost sales as soon as the fourth quarter.
"With the effect of the more preferential mortgage environment to kick in, including a lower down payment ratio for upgrade demand, the cheaper lending rate for first mortgages as well as more supportive housing provident fund loan policies, we believe this should bode well for the continued improvement in the sales momentum in the fourth quarter," he wrote in a note.
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Different from the historical pattern of September sales generally being better than October sales – sales for the first three weeks of this October - across 30 major cities tracked by the bank - have exceeded the level recorded in the same period of September, he said.
With a better October likely, this should translate into the first year-on year increase in national property sales in 2014, he noted.