Citi sees “nuclear” Chinese property bust

Citi’s Oscar Choi and Marco Sze have produced this startling assessment of the Chinese property market:

A Powerful Loosening “Combo” now a MUST to Prevent a “Demand Cliff”: We believe the physical market has reached a critical point, with potential for broader- based demand shrinkage across different product-ends. Beside the recurring factors like tight credit, HPR [home purchase restrictions] policy, altered ASP [average selling price] expectations due to media reporting, etc, different to FY08/11, the downward pressure on demand is also intensified by new factors, like a weaker economy, RMB depreciation, anti- corruption, outflows of purchasing power to overseas, etc, We believe merely fine- tuning policy by the local gov’ts is insufficient to mitigate this potential correction…

June/July – Last Chance to Shoot the Silver Bullet: We believe a “nuclear” impact on economy and employment from any excessive slowdown of this mega- size market (est. total housing value at RMB130-160trn, annual RMB8trn property sales and RMB3-4trn land sales) is not affordable for government and society. To prevent the “demand cliff” and a big correction, we see June/July as the LAST chance for government to introduce powerful measures. Our current judgment is that nationwide volume should peak in FY15 (not FY14, even if it is more challenging than expected), based on the argument that the gov’t could still adopt powerful policy easing to restore buyer interest and a ST volume recovery. Missing this “deadline” could bring about a downward adjustment to our national assumption (sales up 8%, ASP up 2%) and an earlier-than-expected significant correction.

Citi goes the whole hog on recommended easing:

1) HPR relaxation in majority cities

While HPR loosening is becoming a more widely-held view, some foreign investors wonder if the demand must necessarily turn up even if HPR measures are removed. The impact could be overstated, with demand being weaker than expected.

We agree of course that housing demand cannot rise for ever in China and, even if the home purchase restrictions are removed, demand may essentially show no growth. However, our argument is that a short-term boost can be expected, given many prospective homebuyers from suburban areas or those affluent groups looking to upgrade in prime cities are still there. Foreign investors may not be aware, but Chinese homebuyers can buy for longer-term “own-use”, which is not classified as investment demand even if they leave the unit idle.

Thus, we believe China’s basic housing demand should not be understated, in particular for provincial capital and prime cities that offer better medical services, education, employment opportunities and quality of life, where there should still be incremental demand in our view.

2) Credit easing with more favorable terms on downpayments and mortgage rates

We believe just loosening HPR is not sufficient. Central government still needs to rescue the market by pumping liquidity into the market. While this is a repeat of what has been done in the past and not being a favorable measure longer term as this creates more financial risk again, however, given credit in 1Q14 is abnormally tight, we believe see there is room to improve in 2Q and after, though we are not expecting too much given this also involves banks’ own financial risk management.

3) Restore buyers’ ASP expectations with less hostile media reporting

Beyond policy and credit loosening, we believe one of the most important (and yet also the most difficult to control) is buyers’ expectations on property prices, which is a key driver on the housing demand and key to change the “wait and see” stance. We believe a key to restore ASP expectations is fairer media reporting on the property sector without bias and hostility.

Citi reckons there’ll be another can kick and an ultimate bust in 2015. Authorities will relent, of course. But not yet and not until the pain is materially worse than 2011/12 in my view. And I wouldn’t hold my breath the rebound, either. One foot on the brake and other on the accelerator as China inevitably slows.