China’s Housing Bubble Going Supercritical: Unsold Home Inventory At 23 Months, Up 25% Over Prior Year

From Bloomberg News

The biggest immediate risk facing China’s economy is about to get worse.

A reluctance among some developers to sell units at prices lower than they could fetch just months ago threatens to cause a swelling in unsold properties. The worsening glut would extend a slide in construction that’s already put a drag on the world’s second-largest economy, and counter policy makers’ efforts to stimulate the real-estate industry with loosened rules.

In Nanjing, eastern China, nine housing projects originally planned for sale in the first half of 2014 were held for later this year, consulting firm Everyday Network Co. says. The number of homes added to the market in July in 21 major cities dropped 25 percent from June, according to Centaline Group, parent of China’s biggest real-estate brokerage.

“The completed apartments will be in the marketplace sooner or later, and potential buyers will continue to expect prices to fall,” said Hua Changchun, China economist at Nomura Holdings Inc. in Hong Kong. “The property-market weakness hasn’t changed, despite the policy adjustments.”

July economic data due over the next week, starting with tomorrow’s trade numbers, will give a sense of how well growth is holding up after accelerating to 7.5 percent in the second quarter from a year earlier. The statistics bureau releases inflation figures Aug. 9, followed by industrial production, fixed-asset investment and retail sales on Aug. 13.

The floor space of unsold new apartments nationwide on June 30 surged 25 percent from a year earlier, government data show.

Credit Measure

The central bank reports lending and money-supply figures by the middle of August. China’s broadest measure of new credit rose in June to the highest level for the month since 2009, underscoring the role of debt in supporting expansion. Home-price data for cities are due from the statistics bureau on Aug. 18, after June prices fell from the previous month in 55 of 70 cities tracked by the government.

China’s home sales slumped 9.2 percent in the first half of this year from a year earlier, following a full-year 26.6 percent increase in 2013, while new-property construction plunged 16.4 percent. Developers are responding with sales delays and discounts as well as incentives including no-down-payment purchases and buyback guarantees.

Developers’ sales delays in the first half were “very widespread” because prospects were poor given weak demand and tight credit conditions, said Donald Yu, a Shenzhen-based analyst at Guotai Junan Securities Co. “Will the increased supply lead to declines in prices in the second half? That for sure will happen.”

Unsold Homes

The inventory of unsold new homes in 20 large cities jumped to an average of more than 23 months of sales in June, according to Shenzhen World Union Properties Consultancy Inc. data compiled by Bloomberg News. The floor space of unsold new apartments nationwide on June 30 surged 25 percent from a year earlier, government data show.

“Should future demand for property be met increasingly from running down these inventories rather than from new supply, construction activity would also slow significantly,” Moody’s Investors Service said in a report last week.

Developers seeking to sell yet-to-be-completed homes in China must apply for local government approval first. In July, the companies gained permits to sell about 7 percent less housing space than they received in June, according to data on 40 cities compiled by Centaline.

On Sidelines

“Developers have been unable to build up adequate client interest as buyers are still waiting on the sidelines,” said Zhang Haiqing, Shanghai-based research director at Centaline. “They’re also worried that excessive price adjustments may reinforce the wait-and-see mood, and therefore they’re choosing to put out small amounts to test market demand.”

Developers are normally required to begin selling within two weeks of obtaining pre-sale permits, Zhang said.

The average new-home price in 100 cities tracked by SouFun Holdings Ltd., owner of a real-estate website, fell 0.8 percent in July from June, the third consecutive month of declines.

Twenty-eight Chinese cities have eased home-purchase curbs through Aug. 4, according to SouFun. The loosening hasn’t boosted sales, as mortgage restrictions from the central government remain in place and buyers are still hesitant, data provider China Real Estate Information Corp. said last week.

Construction is slowing and inventories of unsold homes will keep rising without an increase in sales, Standard Chartered Plc said in a report yesterday, citing its quarterly survey conducted in June and July of 30 developers, most of which are small and unlisted. “Our survey suggests that the worst times for China’s real-estate sector are still ahead,” economists Lan Shen and Stephen Green wrote.

Shimao’s Actions

Shimao Property Holdings Ltd. (813), a Hong Kong-based developer, delayed sales in the first half in cities with high inventories including Ningbo and Hangzhou due to weak demand and cut prices for some homes, said Tammy Tam, a spokeswoman.

The company also brought forward sales at higher prices in some cities including Nanjing, Tam said. The average price at Shimao’s Junwangshu project rose to 17,500 yuan ($2,850) per square meter in July, from 17,100 yuan in June, according to Inc.’s real estate portal.

Some developers are deciding to offer only a portion of homes built instead of entire projects. In central Wuhan, developers since April have typically offered less than 70 percent of homes in projects with pre-sale approvals, while some companies in Shanghai are selling homes in small batches, according to Centaline.

Cash Flow

The delays mean lower cash-flow for developers. Smaller ones face “massive” debt-repayment pressures, as cash and equivalents at 137 mainland China-listed real estate companies, excluding four of the largest, were sufficient to cover just 74 percent of their short-term liabilities in the first quarter, according to Shenzhen World Union. That’s less than half the average ratio of the other four, including China Vanke Co. (2202)

Greentown China Holdings Ltd. (3900), a developer based in the eastern city of Hangzhou, said this week that first-half profit probably fell more than 65 percent from a year earlier, due in part to “relatively lower gross profit margin” on property sales. Its shares have dropped 16 percent this week in Hong Kong and Moody’s lowered its outlook for the company’s credit rating to stable.

A gauge of property stocks in the Shanghai Composite Index fell 0.7 percent at 10:01 a.m. local time, headed for the third straight daily decline.

“Property investment will remain the biggest macroeconomic risk in the second half,” even as a deceleration in investment is less severe than in the first half, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “It’s a quite natural response from property developers to delay sales and land purchases amid a weak market, and this may affect investment activity in the future.”