Residential Market to Benefit, Looser Policy Environment to Continue
On November 21st the People’s Bank of China (PBOC) cut the 1-year benchmark lending rate by 40 bps to 5.6% and the 1-year deposit rate by 25 bps to 2.75%.
The move comes as economic growth in China continues to slow. The Chinese government has introduced various "targeted easing" measures since the beginning of this year, but domestic economic growth remains weak. The HSBC PMI fell to 50.0 in November from 50.4 in October. A reading below 50 indicates contraction. GDP growth in Q3 2014 slowed to a five-year low of 7.3% y-o-y, down from the 7.4% recorded in the first half of 2014.
Residential sector set to benefit
The residential sector is likely to benefit most from the rate cuts and is expected to see an increase in transaction volume. The expected larger discounts offered on mortgage rates will improve housing affordability and encourage potential homebuyers to enter the market. Housing prices, which have been falling for the past six months, are likely to begin to recover.
However, CBRE believes that housing price growth will be tepid in the near term given that 1) most lower tier cities still have high inventory levels; 2) most developers are still under huge pressure to achieve their full year sales targets, and 3) developers’ liquidity will remain tight until there is a full recovery in the residential market.
Lower chance of developers forced into offloading assets
In the commercial property investment market, the pricing gap between vendors and investors has been widening amid increasing concern over economic growth and the slowing property market. The rate cuts are set to improve developers’ liquidity position and will reduce the likelihood of developers being forced into a fire-sale of their commercial property assets. The rate cuts are also likely to support domestic growth, which will further strengthen vendors’ pricing expectations. The price gap between vendors and buyers may therefore take a while longer to close.
Looser policy environment to remain for next 12-18 months
CBRE believes the looser policy environment will be in place for the next 12-18 months. Further rate cuts may be implemented in 2015. A look at previous real estate policy cycles shows that a loosening cycle typically lasts for a shorter period than a tightening cycle’s three to four years. The loosening cycle between 2008 and 2009 ended after just 15 months due to the rapid growth of housing prices and overheated market following the implementation of the government’s RMB 4.0 trillion stimulus package and severe consecutive interest rate cuts, which saw rates fall by 216 bps in under four months.
However, given this year’s comparatively more stable economic environment and different mind-set of the current leadership, the scale of further cuts is likely to be limited, barring the economy suffering a hard landing. The market is likely to see a milder but longer period of loosening this time around.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
