Chinese home prices declined in 55 of 70 cities in June, with prices overall. This was the second straight monthly decline, following the 0.15% fall in May.
On a year-over-year basis, home prices were up 4.2% in June, compared to 5.6% the previous month.
“With a substantial chunk of demand driven by speculators, falling prices threaten an exodus of buyers. Even holding cash in a bank deposit now offers better returns than real estate,” wrote Bloomberg economist Tom Orlik.
But property data in general has been coming in weak.
New housing starts contracted 10.5% year-over-year in the second quarter, compared with a 25% contraction in Q1. Property investment climbed 12.6% YoY, the slowest pace since Q2 2009. And in June property sales were down 0.2% YoY, compared with a 10.7% fall in May, which was largely attributed to a base effect.
While the pace of decline is slowing, “this does not mean that the worst of China’s property downturn is behind us,” UBS’ Tao Wang wrote in a July 16 note.
“Weak market sentiment and sluggish sales, elevated and rising inventory (especially in Tier 3 and 4 cities), and increasing financing difficulties in the property sector will all continue to weigh on the industry’s outlook,” according to Wang. “While we expect developers to speed up construction in the coming Fall sale season, to accelerate sales and digest inventory, downward pressure on prices and new housing starts will likely grow. We expect construction to slow further as the Fall peak selling season passes, leading to a fresh negative drag on related heavy industries and the economy at large.”
It’s isn’t just about home prices
Wang previously explained that we need to look beyond a slump in prices to a possible construction slump. Even in the absence of a decline in prices, a drop in construction activity “would likely have serious negative impact on the industrial complex and, through that, economic growth and bank balance sheets,” UBS’ Tao Wang wrote.
“Given that property investment accounts for almost a quarter of fixed investment, construction value-added is 13% of GDP, and there are extensive linkages between property and industrial sectors including steel, cement and construction machinery, the impact on the economy from a drop in construction volume is bigger than that from a worsening household balance sheet and consumption,” she wrote.
We recently saw a surge in Chinese credit which is expected to support the property sector. For now, the Chinese property market is looking ugly.
Here’s a chart from Bloomberg’s Michael McDonough: