China's Real Estate Development Forecast: Price-for-Volume Strategy

Recent data from the National Bureau of Statistics of China paints a grim picture of the current real estate market. As of mid-June, real estate sales in 15 major cities had decreased by 5% compared to last year.

Central Bank Measures and Market Response

Despite the implementation of significant measures by the central bank on May 17th to stimulate the market, the anticipated rebound has yet to materialize. Instead, sales have continued to decline.

For instance, in the famous city of Hangzhou, new home sales are only a third of the daily average in 2021, highlighting a severe downturn.

Price-for-Volume Strategy in Second-Hand Sales

Significant price reductions by sellers eager to liquidate their assets have contributed to a rebound in second-hand home sales despite some reports suggesting otherwise. This trend of "price-for-volume" has become a defining characteristic of the current market.

An industry expert noted that the price-for-volume strategy drives sales, and we can expect the effects of the May 17th policies to become evident gradually. However, this perspective overlooks the immediate impact of these policies, which have already been in place for a month without the desired results. Both housing loan interest rates and property prices continue to fall, with no signs of recovery momentum.

The ongoing decline in second-hand home prices, down by 1% in May for the 14th consecutive month, indicates an accelerated downward trend. This suggests that more people are eager to sell their properties while new home sales remain stagnant.

Sellers Cashing Out

The phenomenon of second-hand home sales increasing while new home sales and prices decline indicates sellers are cashing out to leave the real estate market.

The sales often generate cash, and purchasers use it to buy properties abroad in countries like the USA, Japan, Singapore, and Australia. This activity pressures the Chinese government to introduce more measures to support the domestic real estate market.

Impact on Neighboring Countries

This outflow of capital is having a noticeable impact on neighboring countries. For instance, Japan's real estate market is experiencing unprecedented activity, with Chinese buyers flocking to Tokyo to purchase properties. After decades of stagnation, Tokyo is now seeing a surge in property purchases, primarily driven by Chinese capital.

Even high-profile figures like Jack Ma reportedly plan significant investments in Japanese real estate, further underscoring the trend.

In May, Tanaka Keio, a former Goldman Sachs executive in Japan, joined Yunfeng Capital, Jack Ma's investment fund, signaling a strategic focus on Japanese properties.

Core Areas vs. Broader Market

Despite the ongoing devaluation of Chinese real estate, it does not necessarily imply that the market has lost its investment value. Core areas in major cities like Shanghai, Beijing, and Shenzhen continue to hold high market value.

These prime locations remain a safe investment despite the broader market downturn. On the other hand, properties outside these core areas carry significant financial risks.

Investor Recommendations

To navigate these challenging times, investors should focus on prime real estate in major cities while being cautious of the volatile broader market conditions.