Li Bei: The Turning Point of China’s Real Estate is Confirmed

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Current Status of Real Estate Prices

Divergence rather than synchronized decline

Total Demand for Real Estate Has Stabilized

Combined nationwide transactions of new and second-hand homes fell about 30% from 2021 to early 2023, and have since stabilized.

From early 2023 to now, total transactions of new and second-hand homes have been basically stable, with some structural changes. The supply of new homes decreased, and its share of transactions fell from 80% to 50%. Both supply and transactions of second-hand homes increased, with their share rising from 20% to 50%. But in total, the overall demand has not continued to fall, but has remained stable.

This was achieved under the premise that housing prices were falling and demand was suppressed. Real demand would be higher than the current actual transaction levels.

New Home Supply Has Dropped Sharply

The sharp drop in new home supply is a key reason why new home prices remain firm, and also the reason for the shrinkage in new home transactions.

The newly started residential area has dropped nearly 80% from the peak in 2021.

New home inventory has also fallen sharply from the highs.

Whether it's the nationwide started but unsold inventory,

or the inventory at the developer level, both have seen significant declines from the highs.

More directly, the volume of new launches in the top 30 cities has dropped by 70-80%.

The supply of new homes is indeed quite small, and there are also structural changes.

Within the supply structure: the share of high-tier cities is rising, while that of low-tier cities is falling. The proportion of quality homes is increasing, while the share of ordinary starter or upgrading homes is dropping.

Low supply, coupled with structural improvement, has pushed up the average sales price in the new home market. In fact, prices have risen over the past few years.

Second-Hand Home Demand Continues to Rise

Because of insufficient new home supply, demand has shifted to the second-hand home market.

Transaction volume for second-hand homes has hit new highs every year over the past three years. In the last two weeks, it is up more than 40% from the same period last year, at a historical high level.

Since demand keeps hitting new highs, why do second-hand home prices keep dropping?

What's the core driver for the drop in second-hand home prices?

It's supply, namely the listing volume of second-hand homes, which continues to rise and set new highs.

Second-Hand Home Supply Begins Continuous Decline

But about two months ago, a significant change occurred. In 25 cities, the listing volume began to continuously decline and has recently accelerated.

I believe this trend is sustainable, backed by the advantage of rental yields relative to corresponding interest rates.

Since 2021, home prices have fallen sharply, but rents haven't dropped as much. The average rent-to-price ratio in 25 cities increased from 2.0% to nearly 2.4%.

Meanwhile, interest rates at all stages have dropped significantly.

Mortgage rates may have fallen from over 5% at the peak to around 3% now. Business loan rates are only 2.2%.

Why mention business loans? Because in personal medium- and long-term loans, mortgage loans haven't increased over the past two years and are dropping. Business loans are the biggest growth. So, the marginal financing cost for home purchases has become the business loan rate. That's just 2.2%. Bank wealth management and deposit rates fell from 3-4% in previous years to just over 1% now.

In this environment, speaking for two types of people, the value of homes is starting to stand out.

For a renter.

If you buy a home with a business loan, your cost of funds is 2.2%, while the rental yield could be 2.4%. For some second-tier cities, or old public housing in top-tier cities, it's even higher—possibly over 3%. For a renter, buying a home now means your monthly loan payment is less than rent. This situation will stimulate some real housing demand. The fact that second-hand home transactions in the past two weeks have surpassed last year by over 30% proves this.

For a landlord.

You'll find that a few years ago, putting money in the bank or buying wealth management products gave a return significantly higher than rental yields—1-2% higher. But now it's the opposite: if you keep the house and rent it out, you still get an average yield of 2.4%. But bank savings or wealth management is just over 1%. The rental return on the house is higher than wealth management or deposits. In the current backdrop of asset scarcity, if there's no especially good alternative, risk appetite isn't high, and not necessarily entering the stock market, then keeping the house for rent rather than having to sell is more appropriate.

In the past months, the second-hand market went through a round of concentrated listing increase and sharp price drops. I think that was the final round of sell-off, triggered by a margin call on leveraged positions. When the price decline for second-hand homes approached 40%, a group of speculative, leveraged investors had to liquidate. If we look at city differences, the only major city with rising listings now is Shenzhen, which was actually a hard-hit area in the last round of speculation. This serves as supporting evidence.

After this round of so-called margin calls and forced sales, the remaining property holders generally have little leverage and are financially stable. They see houses as undervalued compared to wealth management or deposits, so there's no reason to keep selling.

At this moment, we see:

First, second-hand transactions are rising rapidly. Second, second-hand listings are continuously declining. And behind this is the solid support from the spread between rental yields and interest rates. Falling supply and rising demand is a clear sign of a turning point. This is based on quantitative analysis.

Decline in Second-Hand Home Prices Is Narrowing

Also, in terms of price, there have been clear signals lately.

Last November was when home prices were dropping the fastest. Weekly declines were about 0.3-0.4%, or about 1.5% per month. In recent weeks, the decline rate has been continuously narrowing. Last week, the nationwide index fell 0.17% compared to the previous week; this latest week, the decline was just 0.11%.

This is still the national index. Looking at individual cities, last week Hangzhou and Shanghai both turned positive week-on-week, meaning second-hand home prices in Shanghai and Hangzhou have bottomed out.

Market reversals always start in strong areas, then spread from parts to the whole. At this moment, I am quite confident; although the nationwide index hasn’t turned positive, the turning point is basically confirmed. It’s very likely we’ll see the national index stabilize within two quarters.

Source:Banxia Investment

Risk Warning and DisclaimerThe market involves risks; investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider individual users’ special investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their individual circumstances. Any investment decisions based on this article are at the user's own risk.

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