China’s housing market correction is “sending shock waves through its economy’

Chinese policymakers have for a while been trying to deflate the nation's property bubble.

While its housing market has been correcting, and prices are deflating at a moderate speed, it hasn't bottomed yet, according to Societe Generale analyst Wei Yao.

The National Bureau of Statistics (NBS) reports that new apartment prices have declined under 1.5 percent in average terms since their peak in the second half of 2011. 

The strong balance sheets of Chinese households are supporting property prices, according to Yao, since few homeowners are in a rush to sell their homes and in turn pressure property prices in the primary market. 

Developers on the other hand are slowly lowering the expectations and most of the correction so far has been in the form of sales contraction. 

Sales are declining but prices are still high across major cities

Residential sales have contracted on a year-over-year (YoY) basis for eight straight months in terms of both volume and value. 

While NBS reported recent surges in sales, rising 137 percent month-over-month (MoM) in March, and 16 percent MoM in May, the trend is heading down when you exclude seasonal factors. 

While affordability has improved because of income growth, home prices in major cities are still among the highest in the world. It still takes more than 15 years' annual disposable income for Beijing residents to buy one property there, according to Yao. 

Housing still weighs on the economy

Recent relaxing measures will help ease the pace of the decline, but the economy will continue to feel the drag from the housing sector as long as there isn't a significant improvement in developers' access to credit. 

The slump in land sales — down 18 percent YoY in volume terms and 10 percent in value terms in the first five months — shows the tight liquidity conditions that private developers face. But local governments still refuse to lower land prices:

"This stalemate has started to exert pressure on the  financial situation of local governments, which is one of the reasons we expect less rebound in infrastructure investment than the market. In extreme cases, as reported by local media, some local governments are now even unable to pay the salaries of public sector employees. The housing market correction is still sending shockwaves through the economy."

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