Sales of new homes (on a volume basis) are likely to decline on a YoY basis. This will lead to screaming headlines about the coming collapse of China’s housing market.
Those stories will be completely inaccurate, but they will contribute significantly to investor anxiety about China.
2016 was a very hot year for the property market, and 2017 will be a very soft year, both because of the base effect (new home sales rose by about 25% YoY in 2016) and because the government is tapping on the brakes, primarily by raising minimum cash down payment requirements for luxury homes to 70% in some cities. As a result, new home sales may fall by as much as 10% YoY in 2017, and the first negative YoY numbers may appear in the spring.
But put this in context: if sales fall 10% in 2017, this would be the second-best year in the brief history of China’s commercial housing market, after 2016. A fall of 10% would still mean that Chinese developers would sell more than 11 million new homes (vs. 13 million in 2016), primarily to owner-occupier buyers who will generally put down at least 30% cash. Hardly a crash.
Lower valuations for developers may present a buying opportunity for us, but many investors will be scared. It is also useful to keep in mind that this level of volatility in new home sales is not unusual in China. In 2012, sales by volume rose 2%, before jumping up 17% in 2013. Then, in 2014, sales fell by 9%, without sparking a crisis. The following year, sales rebounded, rising 7%.
Andy Rothman is an investment strategist at Matthews Asia