Green Shoots In Chinese Housing Market: BofAML

Green Shoots In Chinese Housing Market: BofAML

Home sales in China expanded for the second consecutive month in May, aided by a slew of monetary and property easing measures in the past few months, notes BofAML.

Sylvia Sheng and Xiajia Zhi of Bank of America Merrill Lynch in their June 24, 2015 research report titled: “China: green shoots in housing market” anticipate home sales momentum in China to remain robust in June.

Robust home sales growth momentum in May

According to the BofAML analysts, Chinese housing market is showing some signs of recovery in May, though significant divergence exists. They note average new home prices rose in month over month terms in May, reversing the downward trend in previous months. The analysts note there were also modest improvements in property investments and new home starts growth.

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However, Sheng and Zhi at BofAML argue that it is still too early to call a turnaround in the overall housing market. Highlighting a significant divergence between big and small cities, the analysts note Tier-1 cities are exhibiting strong signs of recovery in an array of housing metrics, while signals are less clear for smaller cities.

Taking a confident note, the analysts anticipate home sales momentum to remain relatively resilient in coming months, thanks to continued easing measures and wealth effects emanating from the stock market. They believe the recent home sales recovery could also facilitate property investments with some lag.

The BofAML analysts point out that new home sales continued to exhibit robust growth momentum in May after a decent recovery in April. As can be deduced from the following graph, growth of new home sales in floor space terms and value terms rose sharply to 16.4% and 30.4% yoy in May from 7.7% and 16.0% yoy respectively.

The housing volume recovery was driven by a slew of monetary easing measures, including three interest rate cuts and two RRR cuts since November of last year, as well as supportive property policies.

Chinese housing market: First mom increase in new home prices since May 2014

Sheng and Zhi point out that average prices of new commodity residential properties for 70 medium-to-large sized cities surveyed by the National Bureau of Statistics were up 0.1% mom in May compared with a 0.1% drop in April.

Firming home prices Chinese Housing Market

Interestingly, they note that this is the first mom increase of new home prices since May-2014, which is in line with Soufun’s 100-city average new home price index which increased 0.45% mom in May.

Highlighting the uneven housing recovery in China, the analysts point out that there is a significant divergence in the housing market, with big cities performing better than the small ones. While Tier-1 cities, including Beijing, Shanghai are showing strong signs of housing recovery, Tier-2 cities also displayed some signs of improvement. However, housing markets in other smaller cities, which account for around half of all residential property investments in China, remained relatively weak:

Uneven recovery Chinese Housing Market


Uneven growth of home prices Chinese Housing Market

Sheng and Zhi note both residential property investment and new home starts growth remained sluggish in Tier-2 and other smaller cities in 5M15, in contrast to the strong growth in Tier-1 cities:

Major housing metrics Chinese Housing Market

The analysts anticipate policy support for the housing market to continue in the coming months. They point out that local governments’ permission to convert commodity housing to social housing should augur well for housing market in lower tier cities with high inventory pressures.

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