Wu Ge is the Chief Economist of Changjiang Securities and a director of the China Chief Economist Forum
Key takeaways:
1. There is a shadow, but there is no trace. Whether it is price or sales, the real estate market has further adjusted deeply since the beginning of the year. The reality is that the demand for housing has plummeted and the supply of second-hand homes has increased sharply. Can such short-term changes be explained by long-term factors such as population and urbanization? Can the market be automatically cleared and eventually stabilized through continuous price reductions?
2. Undoubtedly, the overall trend of real estate is related to long-term factors such as population and urbanization. However, the main contradiction at present is that indicators such as real estate sales significantly deviate from the long-term equilibrium values fitted with the above variables. In particular, the changes in residents' behavior reflected by the surge in second-hand housing listings may have a pro-cyclical relationship with the "weak social expectations" mentioned by the central government.
3. From an international point of view, when the real estate is expected to unilaterally adjust, it seems difficult to achieve spontaneous stabilization by price reduction alone. In particular, when the decline in housing prices exceeds the proportion of residents' down payments, there is a possibility that the negative feedback loop will be further strengthened. The macro aggregate policy, not only the real estate industry policy, is the prerequisite for reversing the real estate market, and most countries have the same law.
4. Looking ahead, due to the "high opening" of real GDP in the first quarter, it may be difficult to significantly strengthen the aggregate policy represented by real interest rates, and then implement the established policy arrangements of the "two sessions" step by step. However, measures such as lifting purchase restrictions and preventing risks will continue. The slow issuance of special bonds at the beginning of the year was related to the pre-loading of central transfer payments, which may accelerate in the second and third quarters, partially hedging the pressure on real estate.
Body:
Whether it is price or sales volume, the real estate market has further adjusted in depth. In the first quarter of this year, the sales of commercial housing fell by 27.6% year-on-year, and the absolute scale decreased by 44% compared with the historical high of the same period in 2021. Can the sharp drop in housing demand and the sudden increase in the supply of second-hand housing be explained by long-term factors such as population and urbanization? Can the market be automatically cleared and eventually stabilized through continuous price reductions?
1. Is population the main cause of real estate overshoot?
According to the data of the first quarter, the sales of new homes this year may only be about 900 million square meters, which is significantly different from the long-term equilibrium value of about 1.2 billion according to population and urbanization. Even considering the "overdraft" of demand in third- and fourth-tier cities caused by shed renovation and demolition in the early stage, it is difficult to explain the current decline in demand.
Figure 1. Demand deviates significantly from long-term equilibrium
Source: WIND, the author calculates
Unlike in the past, second-hand homes are replacing new homes as the dominant part of supply changes. Based on the estimation of 14 key cities, it will take at least 17 months to digest the new second-hand housing listings in the past two years. It is worth mentioning that the scale of potential supply is difficult to estimate and depends on the further interpretation of expectations.
Figure 2. The surge in supply stems from changes in expectations
Source: WIND, Zhuge Looking for a house, Shell, the author calculates
Note: The number of listings is the data of 14 cities including Beijing, Shanghai and Shenzhen.
Second, can the price reduction achieve automatic market stabilization?
From an international point of view, after the unilateral adjustment of local production expectations, it is difficult to achieve spontaneous stabilization by price reduction alone. In particular, when the decline in housing prices exceeds the proportion of residents' down payments, there is a possibility that the negative feedback loop will be further strengthened.
Figure 3. Achieve spontaneous stabilization by price reduction alone?
Source: WIND, FHFA, GHLC, author's estimates
In order to break the unilateral expectations of real estate, the macro aggregate policy, not only the real estate industry policy, is the key, and most of the laws in various countries are the same. The later the macro aggregate and risk disposal measures are implemented, the lag behind the real estate stabilization point.
Figure 4. Hedge against the downturn in real estate, but why is bond issuance slow this year?
Source: WIND, Ministry of Finance, the author estimates
Note: The indicator excludes seasonality, and the progress of transfer payment is the progress of budget issuance, and the sample is 2017, 2021, and 2022.
In order to hedge the drag of real estate on the economy, infrastructure construction is indispensable. However, since the beginning of the year, the issuance of local special bonds has been significantly slow, which may be related to the pre-loading of central transfer payments this year. With the decline in the scale of payments to be transferred, the issuance of local bonds is expected to accelerate in the second and third quarters.
III. Basic Conclusions
First, there is a shadow in coming, and there is no trace in going. Real estate trends are related to long-term factors such as population and urbanization. However, the main contradiction at present is that indicators such as real estate sales significantly deviate from the long-term equilibrium values fitted with the above variables. In particular, the changes in residents' behavior reflected by the surge in second-hand housing listings may have a pro-cyclical relationship with the "weak social expectations" mentioned by the central government.
Second, from an international point of view, when the real estate is expected to unilaterally adjust, it seems difficult to achieve spontaneous stabilization by price reduction alone. In particular, when the decline in housing prices exceeds the proportion of residents' down payments, there is a possibility that the negative feedback loop will be further strengthened. The macro aggregate policy, not only the real estate industry policy, is the prerequisite for reversing the real estate market, and most countries have the same law.
Third, looking to the future, due to the "high opening" of real GDP in the first quarter, it may be difficult to significantly strengthen the aggregate policy represented by real interest rates, and then implement the established policy arrangements of the "two sessions" step by step. However, measures such as lifting purchase restrictions and preventing risks will continue. The slow issuance of special bonds at the beginning of the year was related to the pre-loading of central transfer payments, which may accelerate in the second and third quarters, partially hedging the pressure on real estate.
Risk warning: non-linear changes in residents' expectations.
【Author】
Wu Ge: Ph.D., Chief Economist of Changjiang Securities. He has worked for a long time in the monetary policy department of central banks and as an economist at the International Monetary Fund. He is the winner of the Sun Yefang Economic Science Award, the Pushan Policy Research Award, the Liu Shibai Economics Award, and the Foresight Cup Economic Forecasting Champion.
Yu Tao, Cao Haiwei, Gao Tong: Researcher of Changjiang Securities.