Home Price Slowdown Brings Drop in Sales and Construction in Q1

Growth in China’s housing prices continued to slow during March, and a slackening in transactions brought housing sales revenues for the quarter down 7.7 percent compared to the same period last year. And now the market slowdown seems to be discouraging the nation’s property developers, as new construction fell by more than 25 percent in the quarter.

According to data released last week by the National Bureau of Statistics, the value of homes sold during the first three months of this year reached only RMB 1.1 trillion ($177 billion) nationwide, down from RMB 1.199 trillion during the first quarter of 2013. It had been two years since first quarter sales had declined on an annual basis.

Home Price Growth Continues to Slacken

The Bureau’s report provided real estate and construction data for 70 of China’s largest cities, and found that for the most recent month home prices rose in only 56 of these communities, compared to 57 cities recording price increases in February. As in February, prices dropped in only four cities, with Wenzhou leading the decline in home values again in March with a retreat of 4.2 percent compared to the same month last year. The eastern China city has seen housing prices decline now for more than 30 consecutive months.

Shanghai still had the strongest rate of increase in home values during March, with average prices climbing 15.5 percent compared to last year. However, even China’s commercial capital showed signs of cooling off as price slackened from February’s 18.7 percent pace.

Following the trend towards differentiation among housing markets in China’s largest cities from the rest of the country, the three other first-tier cities – Beijing, Guangzhou and Shenzhen – each saw average home price increases of more than 13 percent during March.

Decline in Prices Also Slows Transactions

As price rises become less of a sure thing, fewer buyers now feel forced to buy, and more potential purchasers have begun sitting on the sidelines to see if prices may begin to head south. Would-be sellers are also becoming cautious about divesting of real estate assets in what is shaping up as a slow year for the industry.

The government figures appear to correlate with these sentiments as they show housing transactions declined in terms of area to 178.3 million square meters in the first quarter, down 5.7 percent from the same period in 2013.

Beyond the residential market, overall property sales were off as well with a total of 201.11 million square meters of property changing hands from January through the end of March, down 3.8 percent year on year. The pace of the slowdown seemed to be accelerating, as only a 0.1 percent drop was recorded for January and February, compared to the first two months of last year.

When commercial buildings were added into the overall picture for property sales revenues, the sector was seen declining 5.2 percent to a total of RMB 1.33 trillion in transactions.

Developers Responding to Drop in Demand

The fall-off in transactions already has brought a response from developers, as new property construction during the quarter fell by 25.2 percent compared to 2013, amounting to 291 million square meters (3.1 billion square feet). The figure for new property starts was the lowest since the first-quarter of 2009 before China began a massive stimulus package in the wake of the world financial crisis.

While investment in property development continued to grow at 16.8 percent in the first quarter, the figure for the three months combined was off 2.5 percentage points from the rate in January and February alone.

Market Slowdown a Cause for Wider Concern

In a story by Bloomberg, Credit Suisse’ Jinsong Du seemed alarmed by the slowdown in construction.

“The big drop in new property construction was a surprise and it shows that developers, mostly non-listed, are concerned about the property market outlook and holding off home-building,” the Hong Kong-based analyst noted. “Tight credit, with less money flowing in the market, is the main reason for the weakening sales.”

Records from the People’s Bank of China show that new credit in China fell 19 percent in March compared to a year earlier, and money supply grew at the slowest pace on record.

The country’s government has been relying on a tightening of credit to cool down the housing market, and many analysts believe that commercial lenders are becoming increasingly concerned about the risks facing China’s real estate developers.