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Speaker: Hello and welcome to Under the Banyan Tree with me Fred Newman, Chief Asia Economist here at HSBC in Hong Kong.
Speaker: Today we'll be visiting a topic that we've discussed before and I'm sure we'll discuss time and again and that is mainland China's real estate market.
Speaker: Real estate remains the number one drag on mainland China's economy but we're starting to see some semblance of a shift in sentiment.
Speaker: Here to bring us up to speed are Jing Liu, Chief China Economist, and Michel Kwok, Head of Asia Real Estate Research.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: So we're about two years into the Chinese property correction at this point, and some of the numbers are just staggering.
Speaker: At the end of last year, we had about 4.3 billion square meters of property under construction in China.
Speaker: Just to give you a sense, that would be enough to house about 120 million people or so, the combined population of Germany and Spain.
Speaker: Just a staggering number.
Speaker: Housing sales, however, are down nearly 40% from the peak in 2021.
Speaker: And developers are really struggling to complete these apartments and offload into these apartments into a sluggish property market.
Speaker: On that note, it's time to bring in my guests this week, Jing and Michelle.
Speaker: Welcome to the podcast.
Speaker: Hi, Fred.
Speaker: Thanks for having us.
Speaker: Nice to talk about the housing market.
Speaker: Yes, the housing market indeed, Jing.
Speaker: This is really a key, key theme and has been for many years now.
Speaker: But give us a sense of where we stand in this cycle.
Speaker: We've heard all this negative news about housing sales declining, housing construction being down, swaying the economy.
Speaker: Where are we in terms of the numbers?
Speaker: Is there any sign that in the last couple of months, sales or construction stabilized?
Speaker: Well, if we look at the new home sales, hardly so, but there are green shoots.
Speaker: For example, we see the secondary house sales in large cities actually turn positive year-on-year basis.
Speaker: And even for the completed new home sales, we see the moderate pickup year-on-year.
Speaker: So slight, slight silver lining there.
Speaker: I detect you're fishing out the positives, I guess, from a market that's still overall, of course, down quite a bit.
Speaker: Construction down 60% from its peak still, right?
Speaker: Sales way down from previous peaks as well.
Speaker: Michel, on Friday, we had big news out of China that unveiled a package to help stabilize the market.
Speaker: Can you give us a sense of what sort of the key takeaways were?
Speaker: What surprised you the most and how do you feel about the package that they rolled out?
Speaker: Yeah, I think what really surprised me the most is the timing of the policy package.
Speaker: It came just around two and a half weeks post the April Politburo meeting.
Speaker: So to me, that's really a swift announcement of something serious that the government is really trying to do to rescue the housing market.
Speaker: So the two things here is first, the $300 billion relending scheme.
Speaker: Everyone's going to complain it's very small scale, but to us, it's the gesture that means the most to us.
Speaker: And let me interrupt you right here.
Speaker: When you see 300 billion relending scheme, how does this work?
Speaker: So is the central government making 300 billion available for what exactly?
Speaker: So exactly the central government will make available 300 billion RMB to banks, and as such, banks will supply 500 billion worth of credit to local SOEs to purchase inventory in the market.
Speaker: So state-owned enterprise, the SOE, will buy access inventory using government money, although the central bank is also partly funding that or is actually relending the money, providing the liquidity.
Speaker: So the idea is the government will help really local state-owned enterprises to purchase access inventory from developers that are struggling.
Speaker: What is the other measure that kind of surprised you that you think kind of, you know, what was a surprise in what was announced?
Speaker: Yeah, and I think the other element that caught everybody, basically no one would have expected any demand side measures to be announced is the cut in the down payment ratio nationwide.
Speaker: I stress the nationwide word here is because the government tend to like to tweak policies on a local basis.
Speaker: So a nationwide approach, a blanket approach in cutting down payment, that to us was a big positive surprise.
Speaker: So some surprises here about what was announced, but Jing, let me come to you from an economics perspective.
Speaker: When you read about this package, we just heard from Michelle, 500 billion, Remnant B being made available and purchasing power to buy empty apartments.
Speaker: We see lower down payment ratios for people who want to buy an apartment.
Speaker: They have to inject less of their own money.
Speaker: They can borrow more from a bank.
Speaker: Is that really going to turn the dial?
Speaker: The challenges are vast when it comes to the property sector.
Speaker: Indeed.
Speaker: So if we just look at this package per se, I would say it's still underwhelming.
Speaker: But the good thing is, as Michelle mentioned, is the attitude change.
Speaker: I think the policy stance basically signal that the government is willing to roll out more if needed.
Speaker: So that's a new phase, I would say, for the policy easing in China.
Speaker: So it's more of a signaling that the government has a greater sense of urgency.
Speaker: That's what we're hoping for, that more will come.
Speaker: Michel, can I ask you to put some numbers around this?
Speaker: You mentioned 500 billion in total purchasing power will be made available to buy empty apartments.
Speaker: But give us a sense, how many empty apartments are there and how much money would you need if you wanted to go to China today and buy all the unsold apartments, all the unsold inventory?
Speaker: How much money would you actually need in that context?
Speaker: So it's a very interesting question and it's a question that clients are asking.
Speaker: Some people call this 7 trillion RMB.
Speaker: There are other numbers like a 4 trillion.
Speaker: But in our working, what we calculate is that I think a one and a half to 2 trillion sort of total lump sum should clear around 20% of inventory.
Speaker: But I think another number that I would think is relevant is $300 to $500 billion sort of a lending scheme that would be sufficient to clear around 15 to 16% of completed but unsold flats in China.
Speaker: So those numbers you cite are obviously much larger than the five from the billion we just heard, Jing, right?
Speaker: So to put this in context, when Michel talks about, say, two to three trillion, let's say, that would make a big dent.
Speaker: That's only a few percentage points of GDP.
Speaker: That's not that much money.
Speaker: I mean, of course, it's a lot of money, but it's from a central government's perspective, it's not extraordinary.
Speaker: Why do we not then see more money being available to fix this problem once and for all?
Speaker: What's holding back the government to just say, here, here's the money, let's get on with it.
Speaker: Here, two or three percent of GDP to buy empty apartments.
Speaker: Let's get rid of this problem.
Speaker: Right, so actually we got this question a lot from clients and it seems that there's still some concern about moral hazard and also the government hesitates because for them, maybe there's no basis to directly purchase apartments.
Speaker: So we see here it's actually the SOE which will do the heavy lifting on behalf of the local governments.
Speaker: And maybe another consideration is that they want to see whether the current measures would be enough to change the sentiment and stimulate some solid demand.
Speaker: If that happens, maybe they don't need to spend so much, even a few percentage point of the GDP.
Speaker: Maybe that's done.
Speaker: But if not enough, I think the government may need to do that later.
Speaker: So we're in this process of having incremental measures.
Speaker: It feels like it.
Speaker: Both of you, I think, I get the sense you're saying it's a good first step, but it's not necessarily enough.
Speaker: In order then to kind of improve things along the line, Michel, what are you watching on a daily basis?
Speaker: What would you like to see in the next few weeks?
Speaker: Is it more money being available or do you want to see transactions happening on the ground?
Speaker: What are sort of the signals that you as an analyst like to pick up on to confirm this idea that actually we have gotten into a new phase, recovery phase of the property market?
Speaker: So we need very consistent doses of policies on top of the $300 billion relending scheme.
Speaker: We need something very consistent and something more meaningful.
Speaker: What we would look out for is a potential recovery in buyer sentiment.
Speaker: And what I mean here is that home prices have been on a steady decline over the last one, two years.
Speaker: Developers are cutting prices because they want a clear inventory.
Speaker: But in order for the housing market to broadly recover, we need the market to think that home prices will be stabilized and on a gradual recovery trend.
Speaker: So I think what we would really pay attention to is how impactful is the down payment cut and the mortgage rate cut.
Speaker: Are they sufficient to restore market confidence?
Speaker: So I think this confidence issue is quite important because, of course, you need confidence in the recovering market to bring buyers back in.
Speaker: But it also strikes me that the more of these piecemeal announcements we have, the more they lose their impact.
Speaker: It's almost better if you want to
Speaker: improve confidence that you need one big announcement that kind of jolts buyers into reassessing the property market.
Speaker: So, Jing, on that, is there something on the horizon where you would say they could bring in a big bazooka where everybody says, this is it?
Speaker: Or do you think we'll just be on this very marginal path over the coming months that we get incrementally more measures being applied?
Speaker: I think it depends on the data.
Speaker: So it may not be a quick turnaround in terms of the price, housing prices, but if we will see a much larger transaction volume, probably the government would be comfortable with relatively gradual
Speaker: roll out of the measure because that will give the housing developers a way to get the liquidity and then that can get the whole value chain running.
Speaker: But on the other hand, I sense that there's still this dilemma
Speaker: because they want the market to pick up, but probably not another rally to the point they have to deal with it later.
Speaker: And on that, I think it's also important to see how quickly they can ramp up the supply on the public housing, because that would be the one for affordable housing.
Speaker: And then, you know, the private housing can basically be determined by market demand and supply.
Speaker: The issue of affordable housing, of course, is interesting, and maybe that's a good place to take a quick break.
Speaker: And when we come back, I'm going to ask Michelle how affordable housing is in China in the first place or whether prices still need to adjust lower.
Speaker: So stay with us for the next segment, and we'll be right back.
Speaker: So welcome back, everybody.
Speaker: I wanted to ask Michelle actually about housing affordability.
Speaker: So house prices have gone up for many, many years in China.
Speaker: And maybe one of the causes of the real estate slump is perhaps that house prices have kind of exceeded underlying purchasing power.
Speaker: Now, are houses now affordable, that prices have come down?
Speaker: Or do you think there's still some room for downward adjustment just to bring it in line with underlying affordability?
Speaker: Yeah, right.
Speaker: I think one way to think about it is home price has increased multi-fold over the years, over the last one to two decades.
Speaker: Affordability is a big issue in China, but that's not so a big issue from the perspective that home buyers actually do have very strong purchasing power.
Speaker: What we need at the moment is the expectation that home price would continue to remain stable or if there's room for home price to increase much more.
Speaker: But one market snippet that I can actually share here that can give you some insights on affordability is that
Speaker: The market has been very bad, but the luxury end of the segment in the T1 cities has actually been selling very, very well.
Speaker: So what that actually tells you is that it's still very much affordable, housing is affordable in China.
Speaker: It's the question of whether or not home buyers are confident enough that home price will be stabilized from here onwards.
Speaker: So some signs that maybe price is not too far out of whack.
Speaker: Certainly, we always forget that incomes have risen multiple fold as well in China over the years.
Speaker: So just looking at house price gains doesn't necessarily tell you something about affordability because, of course, China is much richer today than it was 10, 15 years ago.
Speaker: But Jing, one element here is the government's idea to provide more social housing.
Speaker: And I think part of the policy package that was announced on Friday was actually to help local governments convert existing housing stock into social housing.
Speaker: Can you talk to us about this?
Speaker: How new is this for China and how much, how big a role do you think that will play in a future development of the real estate market in China?
Speaker: Right.
Speaker: So actually, I think the new growth model, the Duratrack growth model is quite promising in the sense that the affordable housing in the future might be taken care of by the public housing or social housing, whatever you call it.
Speaker: And then the private housing or commodity housing will basically be left to the market forces to determine where it should go.
Speaker: And in China's case, only less than 20% of the population live in the
Speaker: social housing.
Speaker: Probably if we consider the latest survey where 900 million people live with less than 2,000 RMB a month, maybe China needs a much bigger social housing sector.
Speaker: So that's why I think it's quite promising the government is considering ramping up the supply on the social housing.
Speaker: And given that we have quite some oversupply on the private housing, it is a good idea to convert some of the private housing into the social housing.
Speaker: Some of the people may ask, in the previous round, the Sheddy Town renovation actually has some element of that because people otherwise should qualify for social housing actually are given money.
Speaker: and they are eligible to buy from the private housing market.
Speaker: But the problem with that is if we mixed up these two markets, then basically we see the price rally across the board.
Speaker: So this time around the difference here is whoever will buy the social housing have to be eligible for social housing.
Speaker: So in that case, we have a clear segregation between two markets.
Speaker: So you're talking about a dual-track market, really creating a social housing market and the private market over time in China.
Speaker: So that brings me really to this idea how the private market will evolve, Michel, because, of course, that's the area that you're engaged with most as an analyst, looking at private developers, for example, state-owned developers that sell more into commodity housing.
Speaker: So if you kind of remove a lot of housing stock from the market now, access stock through government funding, what happens after that?
Speaker: Do you foresee a time when you see again a growing market where developers make money to develop projects?
Speaker: Is this still medium term?
Speaker: Is there enough demand there in China to support actually a thriving private market for private housing as opposed to public housing?
Speaker: Yeah, I think it's a great question.
Speaker: Demand is always very difficult to quantify.
Speaker: We tried over the years.
Speaker: A lot of people get it wrong.
Speaker: We also get it wrong sometimes.
Speaker: But I think the other way to think about the next 5, 10 years in terms of the dynamics of the market, I think supply is much easier to quantify.
Speaker: Government is taking out supply, but also the last three years, developers' new starts is down 60% from the peak.
Speaker: So what that means is that new housing supply in the coming years should remain quite depressed.
Speaker: And in fact, what we wrote about just last week is that very soon, in the next one to two years, China should be seeing a new supply squeeze situation.
Speaker: and that should facilitate housing market recovery and bring us much closer to an inflection point after a very painful meltdown just three years ago.
Speaker: So some hope of recovery there, of course, the lack of construction now creating some shortages at some point in the future.
Speaker: But Jing, isn't it true that overall the role of the real estate market needs to shrink in China's economy?
Speaker: So even if we have what Michel terms a supply squeeze in a few years, isn't it true that ultimately we can't continue to build apartments at the scale we have over the last 10 years?
Speaker: Is that right?
Speaker: And how do you think about this evolution of the role of the real estate market in its importance for the overall economy?
Speaker: That's exactly right, because we have seen at the peak, the real estate and related sector contributed to around 25% of GDP.
Speaker: That's certainly not going to be the model going forward.
Speaker: And China has started the transition towards more sustainable growth model.
Speaker: But that just needs time.
Speaker: And in the future, I think there's still upgrading need, such as, you know, living in different types of houses, apartments, condos, et cetera, bigger apartments, maybe newer, higher quality.
Speaker: But still, I think it's reasonable to expect every year the new construction will not be anywhere near the peak we see a few years ago.
Speaker: But we need time.
Speaker: So that's why the smooth structural transition and then the government, you know, clear policy stance, they're willing to buffer for the property market stabilization is very important to us.
Speaker: And of course also that suggests that if we're putting less money into building apartments in the future, we have more funding for other projects investment that hopefully generate more returns than real estate does.
Speaker: And so maybe we'll end up in a better place after
Speaker: this big bubble, you know, burst, and we see China still struggling with the fallout from that.
Speaker: But it sounds like we are gradually, gradually on an improving track.
Speaker: But listening to you two, I think we also need to keep our ears close to the ground and hope for more announcements in the coming months.
Speaker: So I want to thank you very much.
Speaker: And I'm sure we'll check in again with you very soon.
Speaker: Thank you.
Speaker: Thank you, Fred.
Speaker: And we're going to have to call it a day there, folks.
Speaker: Thanks as always for joining us under the Banyan Tree.
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Speaker: From all of us here in Hong Kong, have a great rest of your week, and we'll see you on the next episode.
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