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New home prices in China suffer first monthly drop since 2015

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New home prices in China’s largest cities fell in September, the first monthly drop since April 2015 and a sign that the continued weakness in the country’s real estate sector was spilling over into the real estate market.

Data from the National Bureau of Statistics showed that new home prices fell in more than half of the 70 cities surveyed compared to August. Analysis of the numbers by Goldman Sachs found a price drop of 0.5 percent on an annualized basis after including seasonal adjustments.

The data will increase pressure on policymakers, who have sought to cool the country’s vast real estate sector, but face an increase in defaults and a slowdown in activity in a sector that has anchored economic growth ever since. years.

New home prices rose 3.8% year on year, but the monthly drop follows disappointing third-quarter GDP data this week that confirmed a sharp slowdown in overall growth and a contraction in the economy. real estate sector for the first time since the start of the coronavirus pandemic.

Further price cuts in the real estate market would represent a severe test for Beijing’s crackdown on leverage in the real estate sector, which was launched last summer amid fears of asset bubbles and was put to good use. highlighted by a liquidity crisis at developer Evergrande.

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The real estate reforms are part of President Xi Jinping’s ambitious package as he nears the end of his second term, spanning the tech sector to education. In addition to restricting borrowing from developers, the government has introduced limits on mortgages this year and may soon launch a property tax to curb speculation.

“In the first half of this year, many people still thought these ownership restrictions would be temporary,” said Ting Lu, chief economist for China at Nomura. “As the Chinese government showed more and more determination in these real estate restrictions, the expectations of Chinese households regarding house prices have first of all changed.

“They may not believe that the price of their home will go up forever. It is very, very important.

Chinese real estate developers often sell residential properties through so-called prepayments, whereby clients buy homes before they are built. The non-payment of the obligations of Evergrande, the most indebted developer in the world, combined with the prospect of restructuring and defaults by some of its peers, could jeopardize consumer confidence in their purchases.

According to Bloomberg calculations based on official data, home purchases fell 17% in value in September year on year and 20% in August.

In the third quarter, output in China’s real estate sector fell 1.6% year-on-year, the first contraction since the start of the pandemic. China’s gross domestic product was 4.9% year-on-year over the same period, but only increased 0.2% from the second quarter.

Lu noted that housing price data “can be distorted by price controls,” which he said were “almost everywhere” in China.

Video: Is China’s Economic Model Broken?

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