China Real Estate Outlook: Getting more fragile but far from a crisis mode

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On the economic outlook:
China’s growth slowdown continued in 2014 Q1, on sluggish investment demand as the authorities seek to push for structural reforms and to contain financial risks.
Our growth projections for China trimmed to 7.2% from 7.6% in 2014 and to 7.0% from 7.5% in 2015, as the financial fragilities and the implementation of key reforms continue to act as headwinds to short-term growth.
Risks still to the downside, mainly from the cooling real estate sector and rising shadow banking activities.

On the Real Estate sector:
Real estate sector cooling down after rapid rise in 2013, due to tighter financial conditions, lower GDP growth, and rising financial risks. Downward trend should help to curtail price misalignments, which is estimated to have widened in 2013 (to 5-10%).
We expect prices to increase modestly in 2014, on robust medium-term outlook and growth-supportive policies. We do not expect a collapse in the national housing market, but foresee significant downturns in some local markets with over-supply and soft demand issues.
Local markets diverging; several cities starting to loosen housing policies. Nevertheless, we expect national tightening measures to remain in place.
Over the medium term, the outlook for the housing market remains relatively robust given projected income growth and urbanization.

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China Real Estate Outlook: Getting more fragile but far from a crisis mode

  1. 1. Alicia Garcia-Herrero Chief Economist Emerging Markets – BBVA Research China Real Estate Outlook : Getting more fragile but far from a crisis mode Delegation of the European Union to China Beijing, May 14, 2014
  2. 2. Summary Messages : On the economic outlook • China’s growth slowdown continued in 2014 Q1, on sluggish investment demand as the authorities seek to push for structural reforms and to contain financial risks. • Our growth projections for China trimmed to 7.2% from 7.6% in 2014 and to 7.0% from 7.5% in 2015, as the financial fragilities and the implementation of key reforms continue to act as headwinds to short-term growth. • Risks still to the downside, mainly from the cooling real estate sector and rising shadow banking activities. 2
  3. 3. • Real estate sector cooling down after rapid rise in 2013, due to tighter financial conditions, lower GDP growth, and rising financial risks. Downward trend should help to curtail price misalignments, which is estimated to have widened in 2013 (to 5-10%). • We expect prices to increase modestly in 2014, on robust medium-term outlook and growth-supportive policies. We do not expect a collapse in the national housing market, but foresee significant downturns in some local markets with over-supply and soft demand issues. • Local markets diverging; several cities starting to loosen housing policies. Nevertheless, we expect national tightening measures to remain in place. • Over the medium term, the outlook for the housing market remains relatively robust given projected income growth and urbanization 3 Summary Messages : On the Real Estate sector
  4. 4. 4 1. China’s economy slows down 2. Real estate sector is cooling Outline
  5. 5. Growth momentum moderates further • Growth momentum continued to moderate in Q1 2014 (7.4% y/y), mainly on subdued investment. • Further stabilization in the economy anticipated, thanks to a new mini stimulus package (0.3%-0.4% of GDP so far) and improving exports • The full-year growth for 2014, hence, has been revised down to 7.2% from previous 7.6%, still above the government’s bottom line of 7.0%. China baseline scenario Source: BBVA Research 5 2011 2012 2013 2014 (F) 2015 (F) GDP (%, y/y) 9.3 7.7 7.7 7.2 7.0 Inflation (average, %) 5.4 2.6 2.6 2.6 3.3 Fiscal balance (% of GDP) -1.1 -2.1 -1.9 -2.5 -2.5 Current account (% of GDP) 1.8 2.3 2.0 2.5 3.0 Policy rate (%, eop) 6.56 6.00 6.00 6.00 6.00 Exchange rate (CNY/USD, eop) 6.30 6.23 6.05 6.00 5.85
  6. 6. 6 • Slowing investment has been dampened by the government’s policies and measures, including the waning-off of “mini-stimulus” measures of 2013, and the measures to tackle rising finanical fragilities (shadow banking, local govt debt, housing prices) and the over-capacity/pollutioin issues. • Crackdown on corruption also relevant in explaining weak investment …as investment is dampened by policies Q1 growth slowed down on sluggish investment Source: NBS, CEIC and BBVA Research Recent manufacturing activities are stabilizing thanks to growth-supportive measures Source: CEIC and BBVA Research % yoy ytd -5 0 5 10 15 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Consumption Investment Net Exports GDP growth 35 40 45 50 55 60 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Index 0 5 10 15 20 25 % yoy NBS PMI (LHS) Markit PMI (LHS) Industrial production (RHS)
  7. 7. 77 External demand improving gradually • Exports also decelerated in Q1, despite y/y growth was heavily distorted by base effects and the over-invoicing exports a year ago. • According, the trade surplus narrowed in Q1. Nevertheless, FDI and continued capital inflows add to foreign reserves. • Most recently, April’s exports have improved, thanks to stronger demand from the US/EU/Japan. Exports are bottoming out Source: CEIC and BBVA Research Reserves continue to rise on FDI and capital inflows Source: CEIC and BBVA Research -20 -1 0 0 1 0 20 30 40 50 60 70 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 % yoy -40 -30 -20 -1 0 0 1 0 20 30 40 50 USD bn Trade balance (RHS) Exports (LHS) Imports (LHS) -1 80 -1 20 -60 0 60 1 20 1 80 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 1 ,000 1 ,500 2,000 2,500 3,000 3,500 4,000 FDI OFDI Trade surplus Net portfolio inflow Valuation effect Foreign reserve (RHS) USD bnUSD bn
  8. 8. 88 Inflation remains subdued • Very low inflation inflation environment (1.8% y/y for April), well below the government’s 3.5% target • Producer price inflation stayed in negative territory (-2.0% y/y in April), pointing to sluggish manufacturing activities. • Room for monetary policy easing if necessary. … while PPI deflation stays nagative Source: CEIC and BBVA Research Headline CPI Inflation remains benign… Source: CEIC and BBVA Research % yoy -2 -1 0 1 2 3 4 5 6 7 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Non-food Food CPI Inflation -10 -8 -6 -4 -2 0 2 4 6 8 10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Producer Price Index Consumer Price Index % yoy
  9. 9. Liquidity has stabilized The interbank liquidity become more accommodative Source: Wind and BBVA Research • Inter-bank market rates have stabilized after the June crunch and the mini December one, thanks to the PBoC’s effort to stabilize the market. • Still, credit growth has moderated as the authorities strive to curb credit growth and shadow bank lending. Broad credit growth and bank lending decelerated in March Source CEIC and BBVA Research 9 RMB trn -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 6 8 10 12 14 16 18 New loan (RMB) New loan (FX) Entrusted loan Trust loan Bank acceptance Net corporate bond Non-financial enterprise equity Other Bank credit growth (RHS) % yoy% 0 2 4 6 8 1 0 1 2 1 4 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 7-day Shibor Overnight Shibor
  10. 10. 10 Outline 1. China’s economy slows down 2. Real estate sector is cooling
  11. 11. Real estate: rising importance in the economy Real estate sector’s importance in the economy continues to rise Source: NBS, CEIC and BBVA Research • The sector had been under scrutiny by the market over the past few years, due to a sharp run-up in prices, increasing dependence on shadow bank financing, and excess supply in some areas. • In 2014, however, the sector attracts further attention, as the cooling sector contributes to weaker investment and economic growth and adds to domestic finanical risks. Real estate loans account for one-fifth of bank credit Source NBS, CEIC and BBVA Research 11 % of GDP 0 2 4 6 8 10 12 14 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Construction Real Estate RMB bn 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 12 13 14 15 16 17 18 19 20 21 Housing Mortgage loans Real Estate Development loans Share of Real Estate Loans in Total Loans (RHS) %
  12. 12. Real estate sector is cooling in 2014 Housing price growth moderates recently Source: NBS, CEIC and BBVA Research • Nation-wide housing price growth has moderated after peaking in Q4 • Real estate investment also weakens, as do land sales and floor space starts 12 -20 -15 -10 -5 0 5 10 15 20 25 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 -160 -120 -80 -40 0 40 80 120 160 200 Overall Beijing Shanghai Shenzhen Trading Value (RHS) % yoy % yoy Land sales and real estate investment are falling Source: NBS, CEIC and BBVA Research % yoy 3mma (volume) -60 -40 -20 0 20 40 60 80 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 0 5 10 15 20 25 30 35 40 45 Land sales Real estate investment (RHS) % yoy 3mma
  13. 13. …as rising housing inventories raise concerns Rising housing inventories Source: NBS, Wind and BBVA Research • Housing inventories have been accumulating over the past years. • While lacking city-wise data, it’s believed that those unsold housing units are mainly concentrated in medium and small cities with over-supply but soft demand. • Looking ahead, rising inventories would continue to weigh on the sector 13 Fewer cities report price increases Source: NBS and BBVA Research 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Residential floor space vacancy to completed 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Increase Unchange Decrease
  14. 14. Moderation in prices helps to improve affordability, but local markets are diverging Affordability ratios worsened in 2013* Source: NBS, Wind and BBVA Research • Moderating national prices in 2014 helps to improve severe housing affordability • Local markets are diverging , with Tier 1 cities (Beijing, Shanghai, Guangzhou and Shenzhen) leading price growth. • Some smaller cities (Haikou, Tangshan, and Wenzhou) may face downturn in the real estate market 14 Tier 1 cities lead housing price growth Source: NBS, CEIC and BBVA Research 0 2 4 6 8 10 12 14 16 18 20 22 24 NBS Soufun NBS Soufun NBS Soufun NBS Soufun Beijing Shanghai Shenzhen Guangzhou 2010 2011 2012 2013 Affordable Level * Residential housing price (30 sq meter pc) / Income pc. -5 0 5 10 15 0 5 10 15 20 25 30 Population (mn, 2012) Newhousingpricegrowthy/y (March2014) Chongqing Shanghai Beijing Guangzhou Shenzhen Tianjin Chengdu Wenzhou Haikou Tangshan
  15. 15. Are China’s housing prices misaligned? A demand-supply framework* • To answer this, we have updated and extended our empirical model based on a supply/demand framework. The results are suggestive only. • The model is based on fundamentals, including real income growth (+), interest rates (-), population density (+), housing stocks (-), construction costs (+) and projected income (+) 15 ααααααα titttitiitit d it densrryyysp +++++++= ++ 652,41,321 * ppp it s it d it *** == ( ) cp tt s it s i αα 65 * += Variables in the model: s: housing stocks; y: current and expected per capita household income rr: real user cost of residential capital (measured in real interest rate dens: population density i: investment c: construction cost. Long run demand price Long run supply price Equilibrium: *McCarthy and Peach (2004), “Are home prices the next ‘bubble’?” Economic Policy Review, Federal Reserve Bank of New York
  16. 16. Tier 1 cities: Price misalignments widened in 2013 Housing fundamentals and price levels Source: BBVA Research • Rapid rising housing prices over the past year have widened of housing price overvaluation relative to fundamentals. • In 2013, housing prices accelerated in all six of the largest metropolitan areas (Beijing, Shanghai, Shenzhen, Guangzhou, Chongqing, and Tianjin). 16 Average growth, 2000-2013 Estimated Over-valuation (2013)% Real income Construction costs Population density Actual prices Equilibrium prices Beijing 9.5 0.4 3.4 5.2 4.2 +13.2 Shanghai 9.1 0.3 3.2 6.7 5.2 +8.9 Shenzhen 4.3 0.6 3.5 5.2 4.2 +8.5 Guangzhou 7.5 1.2 4.4 3.1 2.1 +3.4 Chongqing 9.5 1.4 0.3 5.0 5.6 +5.1 Tianjin 9.7 2.1 2.9 5.0 4.9 +3.2 Average 8.3 1.0 3.0 5.0 4.4 +7.1
  17. 17. A robust medium-term outlook: Rising equilibrium prices over time Actual and equilibrium housing prices Source: NBS, CEIC and BBVA Research • Our medium-term outlook for China’s real estate sector remains relatively upbeat on expectations of continued strong underlying fundamentals (rapid growth in expected income and urbanziation) • Our projections are for an increase in nominal housing prices of 40% through 2022, equivalent to an increase of 10% in real terms. 17 80 1 00 1 20 1 40 1 60 1 80 200 220 240 260 280 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Actual propertyprices Equilibrium prices ForecastEquil. prices 1 998-201 3: 85% increase
  18. 18. International comparison: Signs of housing bubbles? International comparison of housing bubbles Source: NBS, Haver and BBVA Research • Is China’s real estate sector following the step of Japan? • Moderate housing price growth will help to mitigate risks of housing bubbles, which have been quite worrisome from international experience. 18 50 1 00 1 50 200 250 300 0 8 1 6 24 32 40 48 56 64 72 80 88 96 S pain 1 997=1 00 US 1 997=1 00 China 2000=1 00 Japan 1 976=1 00 period T
  19. 19. Medium term challenges • Affordability: a pressing social issue • Sound financial incentives and tax policies to facilitate the healthy medium-term development in the sector • Monitoring of the impact of ambitious social housing investment plans 19 China aims for target of 7 million units of affordable housing starts in 2014 Source: NBS, Wind and BBVA Research Unit mn 0 2 4 6 8 10 12 2009 2010 2011 2012 2013 2014 Target Actual
  20. 20. Thank you! Alicia Garcia-Herrero Chief Economist Emerging Markets – BBVA Research Delegation of the European Union to China Beijing, May 14, 2014

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