Monetary stance eases but property controls remain in force

• The 70-city CBRE China National Commodity Housing Price Index weakened by 0.2% m-o-m in May under the continued impact of various restrictive property controls. The drop was the eighth consecutive monthly fall and prolonged the longest period of decline witnessed since 2008.

 

• However, buyer activity picked up during the month with sales volume in 11 major Chinese cities recording a rise of 17% m-o-m. The improvement was mainly due to stronger demand from first-time buyers and the fact that May is traditionally a solid period for sales.

 

• On June 8 the People’s Bank of China lowered its benchmark rates on deposits and one-year loans by 25 basis points to 3.25% and 6.31% respectively, the first such cut in three years. Banks will also be permitted to float their own interest rates around the new benchmark. The deposit rate ceiling has been raised to 110% of the benchmark (3.58%) and the lending rate floor has been lowered to 80% of the benchmark (5.05%). Although the rate cut is expected to stimulate the market to a certain extent, the impact will be limited as long as the Home Purchase Restrictions and other tightening measures remain in force.

 

CBRE Commodity Housing Price Index in 70 Large and Medium-Sized Cities

• Residential prices continued to soften in May under the impact of the Home Purchase Restrictions. Of the 70 cities surveyed, prices in 43 declined on a m-o-m basis whilst 21 recorded no change. The current decline is different to that witnessed in late-2008 when prices recovered quickly after the government implemented a massive economic stimulus package to mitigate the impact of the global financial crisis. Today the government continues to stress that cooling policies will remain in place until prices have fallen to a more affordable level.

• It should be noted that the magnitude of the current correction is still mild, with the Index down by just 2.0% from the most recent peak recorded in June 2011. Over the past six months just three cities have recorded price declines of more than 6%. All of these locations experienced stronger than average price growth of up to 27% during the boom period from mid-2009 to late-2011.

• Movement in housing prices has historically correlated with the M1 measure of money supply by a five month-lag. Following the new interest rate cuts and lower required reserve ratio, the money supply situation will improve slightly going forward. This may shield housing prices from a significant fall in the months ahead.