The recently concluded China's Central Economic Work Conference has put its emphasis on maintaining stability. The real estate market, which is under tremendous pressure from the government policy that "houses are for living, not for speculating" and "deleveraging", has also repositioned itself. This means that the current trend of accelerated decline in the market will be eased with the relative relaxation of policies, and the market's confidence in the stability of the real estate segment next year will also increase. ANBOUND believes that the risk of a "hard landing" next year will ease under the circumstances of this year's "severe winter" in the housing market. That said, new changes are expected to affect the restructuring and transition of the market and bring about a shift in long-term development trends.
While the Central Economic Work Conference's policies emphasized the stability, it has also put the future long-term development direction for it. In the short-term, the development of the real estate market will adhere to the general tone of "stability" to avoid the development to get out of control, which will have a negative impact on stable growth. This does not come out as a surprise, as the real estate sector currently occupies an important proportion in terms of the overall contribution of the country's upstream and downstream industrial chain and the scale of financing in the sector. Institutional research shows that the current contribution of real estate and extended sectors to China's economic growth is about 25%. According to current trends, in the next year, it is expected that the shrinking real estate market will drag about 4% of economic growth.
In the financial sector, the personal mortgage balance of banks alone reached RMB 38 trillion, accounting for 19% of the RMB 191 trillion credit scale. If development loans, bonds, private placements, trusts, etc. are included, the entire proportion of the real estate sector in social financing will exceed 30%. Therefore, maintaining the stability of market will be quite important. At the same time, the recent occurrence of defaults by some private housing enterprises such as Evergrande also shows that its impact on financial stability is rather significant. Once this trend continues, it may constitute an outbreak of systemic risks in the financial sector. This is intolerable to the economic situation both this year and the next year. Therefore, the intention to relax the short-term policy is to "maintain stability" and prevent a "hard landing" from bringing systemic risks, rather than changing the real estate market's positioning of "houses are for living, not for speculating".
In the long run, the policy still adheres to the long-term positioning of "houses are for living, not for speculating", so as to weaken the financial investment characteristics of real estate, and return to meeting the basic needs of housing and industrial and commercial operations. Hence, China's real estate market will usher in a trend change in the long-term.
The Chinese central government mentioned the direction of "both renting and purchasing, accelerating the development of the long-term rental housing market, and advancing the construction of affordable housing". It appears that the housing demand in the commercial housing market will be replaced by "long-term rental housing and affordable housing" to a larger extent, thereby changing the structure of China's real estate market. As a public product, real estate will inevitably introduce state-owned assets to meet the basic housing needs of residents, which will reduce the demand for commercial housing. In addition, the large supply of public housing will also avoid the impact of market fluctuations on housing prices. Therefore, the relative contraction of the commercial housing market space will also become a long-term trend. This also means that the housing market will usher in a long-term turning point.
What needs to be paid attention to is that under the policies of "implementing policies based on the city" and "no speculation in housing", the development model of the real estate market and enterprises will also face changes. In particular, the high-turnover, high-leverage development model that the enterprises have formed over a long period has become unsustainable. Gao Shanwen, Chief Economist of Essence Securities, also pointed out recently that with the continuous advancement of deleveraging measures, the high turnover model of the real estate industry has come to an end. Under the current conditions, the original model has become unsustainable. The business model of the industry may face a third adjustment in the future, which is marked by a forced decline in inventory turnover and leverage. In the next stage, it may shift to high-quality growth and fine control.
This change means that the "post-land era" of China as proposed by ANBOUND is imminent, and the overall urbanization development is changing. The real estate market will transform from an incremental market to a stock market. This will bring trend changes to the housing market, commercial market, land market, and financial market. For real estate enterprises, under the condition of limited market space, they will inevitably face market clearing and changes in investment, financing, and business models. For financial institutions, it is necessary to revise the risk and pricing rating of the enterprises and financing projects. For local governments, it is necessary to consider the transformation of fiscal resources to deal with the reduction of "land finance" resources. These changes mean that "promoting a virtuous circle and healthy development of the real estate industry" is anything but easy.
Final analysis conclusion:
Judging from the development of the real estate market and the content of China's Central Economic Work Conference, short-term policies will be focusing on "maintaining stability", which will help to stabilize the market and create the backdrop for its soft landing. However, the phased maintenance of stability does not mean the return of previous policies. In the long run, the overall shift and transformation of the real estate market will still be in its policy and market trend.
