Revival of residential property sales heralds economic glad tidings

China's real estate sales are expected to revive after COVID-19 is subdued. The expected rejuvenation of the property sector is important as real estate constitutes a key part of the economy, and will contribute to the stabilization of macroeconomy.

Although COVID-19 has had a negative impact on the residential property market, various supportive measures launched by the government are expected to bolster the stabilization of sales in the coming months. The downtrend in interest rates, abundant liquidity in the financial system and the sizable scale of social financing are creating a favorable financial ecosystem for the home market to rebound.

As COVID-19 is reined in gradually, it is time to restore those businesses that received a hard blow. The real estate sector is one of them.

After bottoming out in the first quarter, the property market has already experienced a quick rebound in sales to the level of the end of last year.

Latest data from the National Bureau of Statistics showed new home sales in May reached 147 million square meters nationwide, up 9.7 percent from the same period last year. Among the 70 major cities monitored by the NBS, 57 cities saw their new home prices rise, seven more than the previous month. In the pre-owned home market, the number of cities where prices rose increased to 41 from 37 a month ago.

Apparently, the latest recovery in sales has a lot to do with the release of pent-up demand for homes in previous months, which we regarded as spontaneous recovery by the market itself.

With the guideline "homes are for living in, not for speculation" for backdrop, the central government continues its efforts in trimming the economy's heavy reliance on property. So, it's hard to tell whether the incipient revival in home prices will sustain.

There are certain factors that may hold back real estate price revival. Because of COVID-19, Chinese people's incomes have dropped in the short term. At the same time, household debt hit a historic peak. These changes seem to have dampened the outlook for the home market.

But contrary to general perceptions, we can find examples from both China and the United States that a slowdown in income growth may not necessarily lead to subdued home sales.

That's because people's home purchases are mostly based on their savings accumulated over a long period of time and their anticipation of the future. So, if income drops turn out to be short-term in nature, prospective homebuyers would not overturn their decision to buy a home.

Similarly, although Chinese people's income growth may be affected due to COVID-19, we don't think it would constitute an obvious constraint on real estate sales.

We also don't see a direct connection between household debt ratio and the short-term prosperity of the property market. For instance, Chinese people's home purchase leverage ratio has been on the rise for more than a decade, while residential property sales grew steadily during the same period.

It's worth noting that the home purchase leverage ratio generally changes slowly during a short period of time, so it could hardly become a dominant factor that could trigger drastic variation in home sales. Experience in countries including the US also reflects such a characteristic.