According to the latest report jointly released by Knight Frank and Holdways, in May 2011, the total transacted area of new homes in ten major Mainland cities rebounded from the previous month, but the total area remained at a relatively low level. Meanwhile, new home prices, adjusted by differences in property type, location, fittings and whether they were presale or completed units, edged up a marginal 0.7% month on month.
In May, total primary residential transacted area in the ten cities rebounded 22.5% from April. Aside from Chongqing (-30.0%), all of the ten major cities recorded growth, with Tianjin (59.8%) and Shenzhen (51.5%) witnessing the largest gains. Compared with a year ago, the total transacted area in the ten cities increased 27.4%. However, the sales figure was still relatively low. Most of the cities saw transacted areas drop in May 2011 compared with their average in 2010, with Chongqing (-43.6%), Tianjin (-26.1%), Chengdu (-24.4%) and Beijing (-23.8%) experiencing the biggest declines.
Meanwhile, the rebound in new-home sales was due to increased supply and lower prices in some of the cities. Month-on-month price drops were the sharpest in Shenzhen (-7.1%) and Tianjin (-1.9%), while at the same time, transacted areas recorded the biggest month-on-month gains in these two cities, reflecting the influence of price reductions in promoting primary sales. However, in the short term, price cuts are not expected to figure prominently in developers’ marketing strategies. Given that developers’ financial strength has not deteriorated markedly, we do not expect price discounts to be widely offered across the country.
However, policy risks in the property market remain high. The central government has raised RMB-deposit reserve rates six times so far this year. These increases have the effect of tightening developers’ credit and adding funding pressure. They also suppress home-buying demand, with commercial banks in some cities lifting mortgage rates and down-payment ratios for first-home purchases.
Looking ahead, the supply of new homes in the ten major cities will continue to increase. We expect sales volume to continue growing, but overall to remain relatively low, resulting in higher inventory levels. Currently, it would take about 11 months for the market to absorb all available inventory in the ten cities (assuming sales rate remains the same as the past three months’ average). We believe rising inventory and funding pressure will suppress home prices from the third quarter.