China: Softening the Property Squeeze
- Bottom Line: China authorities are considering softening some of the three red line policies for some residential property developers (here), but the move is not a game changer. This means that the impact on 2023 GDP will likely be small and we are not inclined to change our forecast of 4.7% growth.
Figure 1: Percentage of Respondents that Believe Prices will Rise in Next Quarter (%)
Source: Datastream/Continuum Economics
Loosening The Property Grip
Reports suggest that China’s authorities will allow some flexibility for certain property developers for the three red lines policy, which could include delaying compliance with the 30 June 2023 deadline by up to six months and allowing extra borrowing. This follows on from the 16 measures in November (here) that were also designed to help ease pressures on residential property developers and incentivize buyers.
While additional measures along these lines would be helpful, it would still fall short of a softening of the three red lines policy for all property developers. What is really need is a game changer to help shift the negative sentiment to positive for developers and prospective buyers. Property developers are in a difficult situation, as the previous financing model has been structurally damaged with overseas bond issues difficult for all but the best credits and households becoming more reluctant to accept the model of prepaying for property before it is built. Property developers are going through a multi-year wind down, which is restricting new development and causing downward pressures to house prices as they seek to sell existing inventories – more an issue for 2nd and 3rd tier cities.
Meanwhile, China households do not have enough incentive to go on a buying spree from a macroeconomic standpoint. Official and mortgage rates have not really come down sufficiently to create a buying wave, while uncertainty is high over the economy and employment. The lifting of COVID restrictions will boost the economy, but the benefits to the household sector will likely take 6-18 months to come through and in the meantime the household sector sentiment towards new purchases could remain fragile. Buyers expectations are that residential property prices are unlikely to rise in the new quarter (Figure 1) and while this negative mood persists it will likely mean that property buying will be slow. This all means that new residential property investment will likely remain negative for GDP growth, unless a game changer is seen. None on this leaves us inclined to revise out 2023 4.7% GDP growth forecast.