Morgan Stanley China Economist Says Real Estate to Drop 20% or Less

Morgan Stanley’s leading analyst of China’s economy sounded a reassuring note about the country’s real estate market today, by telling investors that changes in government policy will keep the troubled sector from falling more than 20 percent this year.

Helen Qiao, Chief Economist for Greater China with the US investment bank, noted that the country’s economy recovered in the second quarter thanks to increased capital investment and improving external demand. With overall growth now within the government’s target range, Qiao foresees the government continuing to ease liquidity to support the real estate market which should prevent prices from sliding more than 20 percent.

According to a report in the China Securities News, the Stanford PhD noted that given the economy’s improvement in the second quarter, there is a chance that growth will continue to exceed expectations in the second half of the year, but she still foresees growth for the year hitting the government’s stated target of 7.5 percent.

Liquidity Crunch Brought Down First Quarter Growth

Although China’s economy grew at its slowest pace in 18 months during the first quarter of 2014 with GDP falling to 7.4 percent, Qiao has seen activity strengthening since then. The economist attributed the first quarter slowdown primarily to a liquidity crunch sparked by a lending slowdown.

Since then, however, GDP growth has strengthened following the government’s decision to allow a targetted “mini-stimulus” including making more mortgage credit available to home buyers.

“The main drivers of economic growth in the future will be improved investment in infrastructure, which should be able to offset the impact of the downturn in the real estate market, Qiao said. “Foreign demand should also improve, and helped provide the basis for the economic rebound in the second quarter,” she added.

Real Estate to Be the Greatest Downside Risk in the Third Quarter

Looking ahead at the period from July through the end of September, Qiao projects that infrastructure spending will be the main economic driver, while real estate will present the greatest downside risk, as developers remain cautious of further investment in new projects.

The Morgan Stanley thought leader expects the real estate market to continue to see a correction this year, similar to those in 2008 and 2012, but that prices won’t drop more than 20 percent from last year’s levels.

This kind of dip in prices was not seen as a cause for alarm, and Qiao indicated that the real estate industry was perhaps due for a change in pricing strategy after last year’s surge in sales and prices.

Lower Leverage Seen Keeping Market Calm

Qiao’s confidence in China’s real estate market is said to be based on data from Morgan Stanley showing that, compared to other countries, the amount of leverage among homebuyers in China remains low.

According to the investment bank, household liabilities in China, divided by annual disposable income, remain at 33 percent, lower than in many other nations. The economist was also encouraged by the low percentage of borrowing by Chinese mortgage holders, where downpayment levels typically are set at 30 percent, making it difficult for owners to walk away from loans even if prices slump.

These factors help to reduce the chance of panic selling, and prevent the classic bubble scenario where home prices rapidly collapse.