December 13, 2017 / 9:17 AM / 3 years ago

China's property price rally to stall in 2018 as small city boom wanes: Reuters poll

BEIJING (Reuters) - China’s home price growth is likely to stall in 2018 as a surprise boom in smaller cities is expected to lose steam while measures to tighten credit and other property curbs continue to constrain the market, a Reuters poll showed on Wednesday.

FILE PHOTO: Apartment blocks are pictured next to a construction site on a hazy day in Wuqing district of Tianjin, China, December 10, 2016. REUTERS/Jason Lee/File Photo

China has imposed an array of measures to crack down on property speculation since early 2016, but prices in October still crept up 5.4 percent from a year earlier, largely driven by a buying frenzy that has spread from the big metropolises to the country’s less-regulated smaller centers.

A softening but still resilient property market in the year ahead, underpinned by steady prices, would be welcome news for China’s policymakers, who are keen to keep the market - still a vital source of growth for the economy - stable, as they ramp up efforts to tackle an alarming build-up in debt.

Average nationwide new home prices are expected to flatline by end-2018 after rising a median 2 percent in the first six months from the same period a year earlier, according to a Reuters poll which surveyed 18 property analysts and economists from Dec. 1 to 12.

Prices were forecast to increase 6.8 percent in 2017 and 3.5 percent in the first half of 2018 in the last Reuters poll conducted in August.

The slowdown in China’s home price growth would be primarily due to a decline in sales in tier-3 and tier-4 cities, said analysts at Haitong Securities. Sales are estimated to drop about 10 percent, according to Liu Yuan, head of research at Centaline, a large Hong Kong-based property agency.

Many expect tightening measures to be gradually extended to smaller cities at risk of overheating, where demand may cool as China’s shanty town transformation - a widely applied government drive to offer monetized resettlement for shanty town dwellers - is seen near its end.

“As restrictive measures becomes more widespread and credit conditions tighten across the country, tier-3 and tier-4 cities with shaky fundamentals will be hit by a decline in sales and prices,” noted analysts at Lianjia, a Chinese real estate agency.

In contrast, underlying demand in bigger cities would likely remain solid despite stringent curbs, including government-imposed price caps on new launches, in part due to population growth and still-limited investment options, analysts say.

COMFORTABLE LEVELS

As Chinese President Xi Jinping reiterated that “houses are built to be lived in, not for speculation” at the course-setting Party Congress in October, most analysts polled by Reuters expect growth in sales, investment and credit supply to the sector to weaken further next year.

Beijing would continue to rein in financial risks as banks’ exposure to property soar. The government is also expected to divert credit from “old economies” to new industries to promote industrial upgrade.

“We think property sales will decline in 2018 compared with the previous year, as government cooling measures will likely continue, including resale restriction, purchase qualification scrutiny, and mortgage loan application checks,” said Shen Jianguang, analyst at Mizuho Securities in Hong Kong.

Property investment is estimated to grow 5 percent in the first half of 2018, easing from 6 percent forecast for the second half of 2017 in the last poll.

Beijing has tightened monetary conditions this year to tackle a growing debt pile, but economists don’t expect the government to tap too hard on the brakes next year.

However, tighter credit conditions will be a bigger risk for property developers, especially smaller firms that have been heavily leveraged and aggressive in land bids.

Higher borrowing costs also pose a risk for the sector.

“The biggest uncertainty lies externally; the impact of more-than-expected U.S. rate hikes on Chinese interest rates,” analysts at Lianjia said.

Average mortgage rates for first-time home buyers have edged up more than 20 percent to 5.36 percent in November from a year ago, according to Rong360.com, a loan provider that tracks bank lending rates.

Asked to rate the affordability of Chinese housing on a scale of 1 being the cheapest and 10 the most expensive, the median answer was 7, in line with analysts’ estimates in the last poll.

Additional reporting by Jenny Su; Editing by Jacqueline Wong

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