UBS Says China Real Estate Downturn Has Become Unstoppable

New economic data released last week reinforce the view that China’s economy is struggling to build a meaningful recovery, and at least one investment bank believes that an unstoppable slowdown in China’s real estate industry may be behind some recent disappointing data.

In a research note titled “Bubble Trouble,” UBS Head of China Economics Research Wang Tao wrote that the continuing slide in real estate activity, despite policy action by the government, shows that there is little Beijing can do right now to stop the slide, and this may have implications for the broader economy.

Since tightening credit last year to cool down rocketing real estate prices, China’s central government has in recent months been taking a number of measures to attempt to rekindle housing demand as the property market enters one of its steepest slowdowns in years.

Real Estate Affecting the Broader Economy

While Wang indicated that the government’s recent measures have had some impact on softening the real estate slowdown, the NYU PhD believes that the sector’s sluggishness is making it more difficult for the government to reach its target of 7.5 percent GDP growth this year. With a lack of effective policy measures available for the government, this drag on the economy will become more apparent during the fourth quarter of this year and into 2015.

Last week the HSBC Flash PMI reached its lowest point in three months, and many analysts were shocked by an abrupt drop in lending during July.

Speaking on Bloomberg TV last week Wang indicated that the government could still take further action to stimulate the real estate sector, and that the policy measures at its disposal are far from exhausted. “What they still can cut is the downpayment requirement and also mortgage rates,” Wang said in the interview.

Recent Easing Measures Proving Futile

While these steps remain in the toolbox, however, the limited effect of other recent policy changes taken in the last few months in slowing or reversing the real estate slide have convinced UBS that further government efforts are not likely to succeed.

“The curbs are more or less relaxed by now,” Wang noted. “Over three-quarters of cities have already relaxed that.”

Despite this gradual rollback in home purchase restrictions this year, as well as moves by the government to cut bank reserve requirements and restore preferential mortgage rates for first time buyers, during July China’s home prices fell for the third consecutive month. Figures from the National Bureau of Statistics indicate that home prices in July dropped by an average of 0.9 percent nationwide, even faster than in May or June, with 91 percent of China’s largest cities indicating that housing prices had fallen.

With this much downward momentum in the market and housing buyers seemingly happy to wait for prices to slide further, Wang saw little hope of a fast recovery in the market.

“There’s just simply too much supply, and investors who buy property for investment purposes are not going to be swayed so easily by cutting mortgage rates and downpayment requirements,” Wang said.

A Structural Turning Point – Not Just Another Cycle

With the government lacking the means to quickly reverse the housing downturn, UBS said it expects that during the fourth quarter and into 2015, real estate, new construction and building activities will continue to slow further, creating increasing drag on the economy.

According to the investment bank, investors should adjust to a new paradigm in China’s real estate market, and that even with policy changes, the market will not turn around until structural problems are resolved.

Real Estate to Continue to Slow – Other Investments to Benefit

The bank’s estimates indicate that in 2013 the amount of new housing produced (11 million units completed and over 15 million units of new construction) was significantly higher than the new demand that could be created through urbanisation and other forces.

For 2015 UBS predicts that real estate sales will continue to decline by between 5 and 10 percent compared to 2014, and that the amount of new housing being built may decline another 10 percent as the industry attempts to digest existing inventory.

In her interview with Bloomberg, Wang indicated that “The equity market, bond market, wealth management products, overseas property” would all be beneficiaries of Chinese investment as the domestic real estate market slows.