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Fiona, we’re standing on a street in Shanghai in front of a row of real estate agency shops, and the activity levels seem decent. How does that compare with what you are seeing across the property sector recovery so far this year?
Nationally the property market is on a more stable recovery trend. The numbers are up and down from one month to the next, but generally things are much better than they were last year.
Everybody's focussed on new home sales. But you mentioned the real action is in existing home sales. Why?
Right. So, from January to April this year, existing home sales rose by around 40 per cent to 50 per cent on year-on-year basis, while the new home market was only up by around 10 per cent. And the reason behind this divergence is that new home buyers are still concerned about the delivery of the new homes after they’ve put down their deposits. Because last year we saw a few cases where developers defaulted or ran into financial problems and couldn’t hand over newly built homes to buyers on time.
So macro concerns about developers’ finances have spooked the market?
Yes, but the situation seems to be improving this year after the government stepped in with some support, and I think this issue is gradually being alleviated and we will start to see buyers’ confidence return in the new housing market. Already we have some indications this is happening. According to one third-party database that tracks over 1,000 housing projects where construction has stalled, by May 34 per cent of those projects were completed and successfully handed over to buyers. That compares with just 23 per cent of projects as of March. Progress like this suggests confidence will be coming back to the new home market, but gradually.
How does that shape demand and pricing trends that you're seeing in terms of new home sales versus existing home sales?
If you look the situation in tier one cities, like here in Shanghai, I think new home prices are already very stable. In fact, new homes are usually priced at a big discount to the second-hand market.
Hang on, why would new homes be priced at a discount to lived-in homes?
Yeah, that’s because the local government has put some price caps on the amount that developers can charge new home buyers. In practice, it means that new homes in Shanghai can sell for a discount of around 30 per cent to 40 per cent compared with nearby homes in the secondary housing market.
What about demographics? Isn’t that more of a long-term headwind for demand in the housing market? How do you see that playing out in a city like Shanghai?
The big shift is that we have a peaking population, but structurally we still see that internal migration continues to flow from the lower tier cities to the higher tier cities. So, I would say that I'm not very pessimistic on the demand in the higher tier cities, especially as demonstrated by those price discounts on new homes in Shanghai that I mentioned. Demand in the tier one cities is likely to be backed by continuous population inflows for the foreseeable future.