Market Research

Nomura Warns Chinese Property Has Reached “A Tipping Point”

Tara Loader Wilkinson, Asia Editor, 23 November 2011


Eighteen months after tightening real estate policy, as sales slump and prices soften, investment in China’s housing market is predicted to fall to 2008 lows, according to analysts at Nomura.

Eighteen months after tightening real
estate policy, investment in China’s housing market is predicted to fall to 2008
lows, according to analysts at Nomura.

As sales slump and prices soften, analysts at the Japanese bank predict housing
investment in China will slow sharply during this quarter and next, for three

First, prices of
second-hand apartments in five top-tier cities dropped by 0.2 per cent on the
previous month in October, the first decline in the past 15 months. Media
reports of large companies cutting prices for new apartments are increasingly
common, as financing conditions tighten.

The National
Bureau of Statistics reported on 18 November that among the 70 major cities
surveyed, house prices fell in 34 cities in October, from September. In
September, only 17 cities showed a price decline.

Second, land
area purchased by property developers has contracted in
year-on-year terms for four consecutive months since June. In August and September,
land area purchased by developers fell by 17 per cent year on year.

Sales have also
plummeted. Floor space sold in China in October
fell 11 per cent year on year in value terms and 10 per cent in space terms. Since
sales volume in the month of October is usually good, developers hoped decent
October revenues would help mitigate financing problems, but they were
disappointed, said analysts at the Japanese bank.

Historical patterns

“History suggests that housing investment
should slow faster from here. The situation today seems very similar to
2007-08, when the housing market also went through a downturn due to tight
government policies. At that time, a housing boom led to soaring prices and
fast investment growth. The government introduced a series of tightening policies,
such as cutting loan supply to property developers and raising downpayment
requirements. These measures eventually managed to halt price increases,” said

The bank added that it believes China’s
property market may have reached a tipping point similar to that in April 2008,
and, if so, private housing investment should drop quickly in 2012. Moreover,
current tight policy in this sector is unlikely to change. Xinhua reported
Premier Wen Jiabao’s comments on 7 November emphasizing that the current tight
policy in the housing sector needs to be maintained.

Cautiously optimistic

Nevertheless, it is not as gloomy as it

housing investment can grow by 14 per cent year on year in 2012 - equivalent to
the lowest annual growth rate for housing investment over the past 10 years,
which occurred in 2008. The bank still believes double-digit growth is possible
due to its expectation that second- and third-tier cities will continue the
urbanization process, and they currently constitute the majority of housing

While 14 per cent growth does not sound
too bad, there are good reasons to be cautious on the property market outlook,
said Nomura.

First, downside risks outweigh any
potential gains in 2012, given that tight policy should remain in place.
Second, the forecast slowdown comes from a very high base – residential
investment grew by 34.2 per cent y-o-y for the first 10 months of 2011, while private
housing investment grew by 24.2 per cent, according to Nomura estimates. 

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