Bottoming out of housing prices: a possible logic

The reversal of supply and demand, correction of residents' preference for housing allocation, and gradual shift of the housing price anchor towards rental yield. 1) In the rent-to-price ratio model, house rent serves as the anchor point for house prices: residents' income, preference for housing, and housing supply collectively determine the level of rent, while the discounted future rent determines the level of house prices. 2) In the past, high housing prices and low rental yields in China were due to residents' high preference for housing allocation in asset allocation, not due to insufficient supply. However, residents' high preference for housing does not necessarily imply expectations of rising house prices and the assumption of good housing liquidity. 3) With significant changes in the supply and demand relationship in the current real estate market and significant downward pressure on house prices, residents may find it difficult to purchase houses based on the logic of expected price increases, leading to a gradual shift of the housing price anchor towards rental yield.

Without considering residents' expectations of rising/falling house prices, we calculate the theoretically equilibrium rental yield to be between 2.58% and 2.85%. After houses return to their residential attributes, micro subjects will compare the cost of renting and buying to decide whether to purchase a house. We break down the capital cost of residents' house purchases into 4 parts: the opportunity cost of using own cash for down payment (1-year financial return rate of 2.4%), the cost of using housing provident fund for down payment (housing provident fund deposit interest rate of 1.5%), the cost of housing provident fund loans (2.85%), and the cost of commercial loans (currently the lowest at 3.4% in first-tier cities, 3.25% in second-tier cities, and 3.15% in third-tier cities). Excluding expectations of house price increases/decreases, combining the distribution proportions of the above 4 parts, we calculate that the theoretical cost of residents' first home purchase is around 2.58%-2.85%, which is the equilibrium rental yield.

Considering real friction costs, there are differences in the bottom of rental yields in different cities, such as differences in rental and sales rights, buying preferences under the same cost, building age, etc. Considering residents' real situations and preferences, we provide two possible decision-making logics for rigid demand families: 1) The additional expenses for rigid demand families after purchasing a house, where the monthly mortgage payment exceeds the sum of monthly rent and monthly housing provident fund, are considered. If the monthly payment = monthly rent + monthly housing provident fund, i.e., additional expenses are 0, then rigid demand families have relatively low cash flow pressure after purchasing a house, making the decision-making process smoother, and the bottom of rental yields in high-energy cities is expected to gradually appear. 2) The less the part of the monthly mortgage payment after purchasing a house exceeds the family's monthly rent, the easier it is for residents to make the decision to purchase a house. If the monthly payment = family's monthly rent, then rigid demand families without housing provident fund or with low housing preferences may also start allocating housing, thereby gradually leading to the appearance of price bottoms in low-energy cities with oversupply. Based on the above logical assumptions, we select typical cities of different energy levels and calculate the possible paths for their rental yields to reach the bottom. According to calculations, the bottom of rental yields in first-tier city Shanghai may be at 1.78-1.93%, while in strong second-tier cities like Chengdu and Hangzhou, it may be at 2.03%-2.2%, and in third and fourth-tier cities like Huizhou, Yibin, and Fuyang, it may be at 3.03%-3.54%. Overall, we believe that for some cities, the period of the largest house price decline may have passed, and prices are expected to move towards the bottoming process The appearance of the price bottom does not mean a fundamental reversal, the key lies in the unchanged logic of residents' asset allocation. 1) After the subprime mortgage crisis, the Federal Reserve quickly cut interest rates, with the federal funds target rate falling to 0.25% in December 2008. By the first quarter of 2011, the 30-year fixed mortgage rate was significantly lower than the rental yield, but during this period, the real estate market did not stop falling in terms of volume and price. It wasn't until 2012, with extremely low mortgage rates and low new home inventory, along with gradual improvement in U.S. employment and household income, that new home sales began to rise. 2) In 2014, China relaxed restrictions on home purchases, lowered interest rates, and other policies were frequently introduced, but the effects were only to provide support. It wasn't until the currency reform of shantytown renovation and urban expansion in June 2015 that the real estate market in China truly saw a significant uptrend. 3) If the rental yield cannot significantly exceed the cost of buying a house, it lacks the foundation to stimulate residents to actively allocate housing. In addition, China still faces factors such as high housing inventory and slowing urban population growth, which may make it difficult to change residents' home-buying behavior.

Investment advice: Wait for the appearance of the right side of the industry. In the previous report, we emphasized being cautious about the mutual squeeze between second-hand housing and new housing by 2024, which is already evident. The value of real estate companies mainly lies in land reserves. When the fundamentals can repeatedly confirm that prices have bottomed out, it may be the comfortable "hitting zone" for the real estate sector. It is recommended to wait for prices to initially bottom out and for the right side of the industry to appear. Focus on relatively certain opportunities: 1) Some real estate companies are the first to solve historical land reserve issues, with valuation centers expected to rise; 2) In the era of second-hand housing, intermediary companies with certain moats; 3) Urban village renovations.

Highlights of the Report

The correction of residents' preference for allocating residential properties, the gradual shift of the housing price anchor towards rental yield, and the difficulty of the past situation where high inventory and high housing prices coexisted may not be reproduced. 1) In the past, residents' allocation of residential properties was often based on expectation logic, with expectations of rising house prices and the assumption of good liquidity of residential properties driving residents to buy houses. However, when there is a significant change in the supply-demand relationship in this round, with significant downward pressure on housing prices, residents' home-buying behavior may shift from expectation logic to comparative logic, where income determines rent, and rent determines house prices. The high housing price-to-income ratio in China is actually due to low rental yields, and income transmission to rent is relatively reasonable. 2) The core reason for the simultaneous existence of high inventory and high housing prices in the past was urban expansion. Under the old development model, real estate companies leveraged land acquisition, and local governments used land finance to improve infrastructure construction, subsidize investment-attracting enterprises, drive industrial development, attract industrial population to leverage to buy houses, and real estate companies benefited from the expected land appreciation after industrial and population realization, forming a closed loop. When economic and population growth slows down, urban expansion continues to slow down, and new housing demand will also significantly decrease.

This report attempts to explore the possible evolution path of housing prices from the perspective of rental yield. 1) If we look at first and second-tier city housing prices with rent as the anchor, the rental yield of some older residential properties is close to 2% or even exceeds 2%, indicating that the prices of these properties may have bottomed out or are in the initial stages of forming a bottom, while prices of relatively new and new properties may still face certain pressures. 2) Looking at third and fourth-tier city housing prices with rent as the anchor, the rental yield in some cities has reached a reasonable range of 3%-3.5%. Some projects even approach 4%. Due to the excessive overall inventory in some cities and the failure to realize industrial and population expectations, these cities may face certain pressure for further rent declines in the future The excessively high rental yield may see a regression. However, overall, we believe that the period when house prices in some cities experienced the largest decline may have passed, and prices are expected to move towards a bottoming process.

Investment Logic

Without considering residents' expectations of rising/falling house prices, we calculate that the theoretically balanced rental yield is between 2.58% and 2.85%. Taking into account factors such as different rights for renting and buying, housing preferences, building age, and differences in second-hand housing liquidity caused by the city's level, we estimate the bottom of rental yields in different-tier cities based on the actual purchasing decision logic of microeconomic entities. The bottom of rental yields in first-tier cities like Shanghai may be around 1.78-1.93%, while strong second-tier cities like Chengdu and Hangzhou may see the bottom of rental yields around 2.03%-2.2%. Third and fourth-tier cities like Huizhou, Yibin, and Fuyang may have the bottom of rental yields around 3.03%-3.54%. Overall, it is possible that the period of the largest decline in house prices in some cities has passed, and prices are expected to move towards a bottoming process. The decrease in mortgage rates can reduce residents' housing purchase costs, indirectly pushing up the new equilibrium center of house prices. As previously mentioned in the report, we emphasize being cautious about the mutual squeeze between second-hand and new houses in 2024, which is already evident. The value of real estate companies mainly lies in the value of land reserves. When the fundamentals can repeatedly confirm that prices have bottomed out, it may be the comfortable "hitting zone" for the real estate sector. We recommend waiting for prices to initially bottom out and for opportunities to appear on the right side of the industry. Key focus on relatively certain opportunities: 1) Some real estate companies are the first to solve historical land reserve issues, with the potential for valuation center to rise; 2) In the era of second-hand houses, intermediary companies with certain moats; 3) Urban village transformation.

Main Report

1 Reversal of Supply and Demand, Residents' Adjustment, Housing Price Anchor Gradually Shifts to Rental Yield

(1) Faced with downward pressure on housing prices, residents' preference for residential asset allocation may be corrected

The pricing logic of residential properties is that income determines rent, and rent determines house prices. The actual high house price-to-income ratio in China is actually due to low rental yields, with income transmission to rent being relatively reasonable. 1) In the rent-to-price ratio model, house rent is the anchor of house prices: residents' income, preference for residential properties, and the supply of residential properties collectively determine the level of rent, and the discounted future rent determines the level of house prices. 2) Rent better reflects residents' preferences and the supply-demand situation. According to the China Index Research Institute's "Summary of China's Housing Rental Market in the first quarter of 2024," the average rent-to-income ratio in 50 key cities is 18%. According to a rental market report released by the American real estate information website Zillow, the median proportion of household income used to pay rent in early 2024 was 29.2%, to some extent reflecting the housing consumption of Chinese residents as relatively reasonable, indicating that housing supply is not the core factor leading to high house prices. Under high house prices, the low rental yield implies that residents have a high preference for residential property allocation when making asset allocations.

Residents' high preference for residential properties is not necessarily inherent, with implicit expectations of rising house prices and the assumption of good liquidity for residential properties. In the past, residents allocated a high proportion of their lifetime income to real estate, with urban residents' residential assets accounting for nearly 60% of their physical assets. There are two behavioral patterns behind this: 1) Under high house prices, advance purchase of houses with larger living areas; 2) Apart from their own residential needs, overallocation to multiple residential properties. Both behaviors are based on residents' expectations of rising house prices. When comparing mortgage interest rates with rental yields, China's mortgage rates have been above 4% for a long time, higher than rental yields. Without house price appreciation, residents' equity would be in a net loss position. Another implicit expectation is liquidity, meaning that residential properties can be liquidated when needed. Although there are explanations in the market such as "residents have no investment channels" and "residents naturally prefer residential properties," we believe that the rational expectation hypothesis is more important than the above assumptions. If there is an overall excess of residential properties and investment cannot be easily converted into cash in the future, it is expected that residents' high preference for residential properties will also be difficult to sustain.

However, against the backdrop of significant changes in the supply-demand relationship in the current real estate market, house prices face considerable downward pressure, making it difficult for residents to purchase houses based on the logic of expected price increases. Looking at house prices in 70 cities, the number of cities experiencing month-on-month and year-on-year price declines has been increasing since May 2023, with over 60 cities in April 2024; for residents, if house price appreciation is difficult to achieve, residents' preference for residential properties may be corrected. In a scenario where house prices do not rise and there is an excess supply, the liquidity of second-hand houses deteriorates, leading residents to reduce their allocation to residential assets. Looking at the listing volume of second-hand houses in first-tier cities, there has been a significant increase in listings since 2023.

(II) The coexistence of high inventory and high house prices in the past was due to urban expansion.

Under the old development model, house prices were mainly boosted by urban expansion, with real estate companies acquiring land in advance to expand their land bank. In our report "The Fate of the Big Turning Point - Economic Research on Real Estate Revolution," we detailed the development model of the past real estate industry. In a situation where economic development generally lacked capital, apart from some cities benefiting from foreign capital, most governments mainly relied on land finance. Real estate companies leveraged land acquisition, and local governments used land finance to improve infrastructure construction, subsidize attracting investment enterprises, promote industrial development, attract industrial population to leverage for house purchases, and real estate companies benefited from the appreciation of land value after the expected realization of industry and population This forms a closed loop. However, before 2020, the growth rate of urban built-up area was much faster than the population growth rate in urban areas. 2) When economic and population growth slow down, the risks of preemptive land acquisition will be exposed, manifested at the city level as high inventory or even abandoned buildings, and at the real estate enterprise level as difficulty in liquidating land reserves under high leverage. Due to continued sluggish transactions, the liquidation cycle remains at a relatively high level in recent years. According to statistics from Ke Rui, by the end of 2023, the narrow inventory of the top 100 cities had decreased to 530 million square meters, with the liquidation cycle still exceeding 24 months.

When urban expansion continues to slow down, the demand for new homes will decrease significantly, and high inventory and high house prices cannot coexist. 1) Taking Beijing as an example, after the central urban area is fully developed, the supply and transactions of new homes decrease significantly. In 2021, the transaction area of commercial housing in Beijing decreased by 10.03 million square meters compared to 2009. 2) Taking Nanjing as an example, in recent years, the transaction volume of new homes in the suburbs has dropped significantly. In 2023, the transaction area of new homes in the suburbs decreased by 60% compared to the market peak in 2021, and the core area decreased by 32%. The significant decline in the transaction area of new homes in the suburbs of Nanjing has suppressed the central housing prices.

Theoretically, the reasonable rental yield for residential properties is between 2.58% and 2.85%

After housing returns to its residential nature, micro subjects will compare the cost of renting with the cost of buying a house to make decisions. We construct a model to analyze the balance between the cost of buying and renting.

The capital cost of residents buying a house can be decomposed into:

1. Opportunity cost of using own cash as a down payment: We calculate the opportunity cost based on the expected annual return rate of current one-year financial products, which is approximately 2.4% as of May 2024.

2. Cost of extracting housing provident fund as a down payment: Since 2022, more than 20 provinces and cities including Nanjing, Fuzhou, Qingdao, Huizhou, Zhongshan, Zhuhai, Meizhou, and Hainan have explicitly allowed the extraction of housing provident fund as a down payment. In practice, residents in first-tier cities can pay the down payment by extracting the housing provident fund to repay the commercial loan in advance. The current interest rate on housing provident fund deposits is about 1.5%, which can be used to calculate the opportunity cost of extracting the housing provident fund as a down payment 3. Cost of Housing Provident Fund Loans: Currently, the amount of housing provident fund loans in most third and fourth-tier cities can cover the house purchase. As of May 2024, the interest rate for housing provident fund loans for first homes nationwide for over 5 years is 2.85%.

4. Cost of Commercial Loans: On May 17, 2024, the central bank canceled the lower limit of interest rates for first and second home commercial loans nationwide. Some key cities have followed up on related policies. By the end of May, the lower limits of interest rates for first home commercial loans in some key first-tier cities, second-tier cities, and third and fourth-tier cities have been reduced to 3.4%, 3.25%, and 3.15% respectively.

Excluding expectations of rising/falling house prices, we calculate that theoretically the cost of purchasing a first home for residents is around 2.58%-2.85%. Due to the weak willingness of residents to leverage at present, we assume a calculation of theoretical house purchase costs based on a down payment ratio of 40% and a loan ratio of 60%. 1) For most first and second-tier cities, where the housing provident fund loan amount cannot fully cover the total mortgage loan, we calculate the house purchase cost to be around 2.79% based on 35% own cash, 5% withdrawal of housing provident fund for down payment, 30% commercial loan, and 30% housing provident fund loan. 2) For third and fourth-tier cities, we consider two extreme scenarios: first, where residents' housing provident fund loan amount can cover the total mortgage loan, we calculate the house purchase cost to be around 2.58% based on 30% own cash, 10% withdrawal of housing provident fund for down payment, and 60% housing provident fund loan; second, where some residents do not have housing provident fund, we calculate the house purchase cost to be around 2.85% based on 40% own cash and 60% commercial loan.

Considering the impact of only reducing commercial loan interest rates on the house purchase costs of various cities, sensitivity analysis shows that the effect of only lowering commercial loan interest rates on reducing the total house purchase cost may be limited.

3. Considering Real Friction Costs, Possible House Purchase Logic for End-User Families

Even after excluding expectations of rising/falling house prices, there are still some frictions in the above model. 1) Currently, not all housing in China has equal rights for renting and selling. Some commercial properties still have social functions unrelated to residential value, such as being tied to school districts, household registration, etc., and only buyers can enjoy corresponding rights. 2) Under the same financial cost for buying and renting, due to factors such as end-user needs for marriage and living comfort, the preference for buying a house is often stronger than the preference for renting 3) Factors such as the age of the building: Houses over 20 years old have poor living comfort, and residents have a premium acceptance for relatively new houses/new houses. For old and rundown houses, the cost that residents can accept for purchasing may be lower than the cost of renting, while for relatively new houses, the cost that residents can accept for purchasing may be slightly higher than the cost of renting.

1. Factors related to the city's energy level: In some high-energy-level cities with relatively healthy supply-demand structures, the liquidity of second-hand houses is better. In low-energy-level cities with oversupply, residents have a lower acceptance for the difference between the cost of buying a house and renting a house, and may even accept a negative value.

2. In reality, there are methods such as purchasing and storing, exchanging old for new, and transferring leased land to increase the supply of affordable rental housing in the market, leading to a decline in urban rental yield. This may further lower the balance point of the cost of buying a house vs. renting.

Families without a house need to pay rent every month, while after buying a house, they need to pay the monthly mortgage. Based on residents' real situations and preferences, we provide two possible decision-making logics for families without a house:

1. The additional expenses for families without a house, which is the part where the monthly mortgage payment after buying a house exceeds the sum of monthly rent and housing provident fund, are considered. If monthly payment = monthly rent + monthly housing provident fund, meaning the additional expenses are 0, we believe that at this point, the cash flow pressure for families without a house after buying a house is relatively small, making the decision-making process smoother. The bottom of the rental yield in high-energy-level cities may gradually appear.

2. The less the part of the monthly mortgage payment after buying a house exceeds the family's monthly rent, the easier it is for residents to make the decision to buy a house. If monthly payment = family monthly rent, families without a housing provident fund or with low housing preferences may also start to allocate housing, thereby gradually leading to the price bottom in low-energy-level cities with oversupply.

Based on the above logical assumptions, we have selected typical cities of different energy levels to calculate the possible bottom of their rental yields.

1. Possible path for the rental yield bottom in Shanghai, a first-tier city: In 2023, the average disposable income of urban residents in Shanghai is about 89,500 yuan, and the rental income ratio is about 27%. There is no serious housing oversupply in the main urban areas of Shanghai. Even if house prices fall, it is difficult for the corresponding mortgage monthly payment to decrease to the level of rent for families without a house. Therefore, based on the disposable income and rental income ratio of urban residents in Shanghai, we calculate the mortgage monthly payment they are willing to bear (assuming monthly payment = monthly rent + monthly housing provident fund). Then, according to the equal principal and interest repayment method for 30 years, we calculate the loan amount and total house price in reverse, with the down payment as the sunk cost (considering the housing preference of buyers). We estimate that the bottom of the rental yield in Shanghai may be between 1.78% and 1.93%.

From the perspective of rental yield of typical new houses, second-hand houses, and old dilapidated houses in Shanghai, some older second-hand houses have rental yields close to the bottom level, while new and second-hand houses may still face pressure. We selected new housing projects with unit prices ranging from 43,000 to 115,000 RMB per square meter for analysis. For a minimum area of 89-107 square meters three-bedroom layout, the rental yield is between 1.2% to 1.5%. The higher the unit price and the larger the area of the house, the lower the corresponding rental yield. The rental yield of surrounding second-hand houses is generally higher than new houses, especially for some older second-hand houses where the rental yield is close to 1.8%.

2. Possible paths for some strong second-tier cities to reach the bottom of the rental yield: Taking Hangzhou and Chengdu as examples, their per capita disposable income of urban residents in 2023 is 81,000 and 57,000 RMB respectively, with a rental income ratio of about 20%. Based on the per capita disposable income of urban residents and the rental income ratio, we calculate the monthly mortgage payment they are willing to bear (assuming the monthly payment = monthly rent + monthly provident fund). Then, according to the equal principal and interest repayment method over 30 years, we calculate the total price of the house, with the down payment as the sunk cost (homebuyers have residential preferences), and estimate that the bottom of the rental yield in cities like Chengdu and Hangzhou may be between 2.03% to 2.2%.

From the perspective of rental yield of typical new houses, second-hand houses, and old dilapidated houses in Hangzhou and Chengdu, some older second-hand houses are basically close to the bottom level of rental yield, while new and second-hand houses may still face pressure. We selected new housing projects in the main urban area and peripheral areas with unit prices ranging from 15,000 to 48,000 RMB per square meter for analysis. For the smallest area of two-bedroom, three-bedroom, and four-bedroom layouts, the rental yield ranges from 1.1% to 1.4%. Except for some cost-effective popular projects where the rental yield exceeds 2%, generally, the more expensive the unit price and the larger the area, the lower the corresponding rental yield. The rental yield of surrounding second-hand houses is generally higher than new houses, especially for older second-hand houses where the rental yield is basically between 2% to 2.4%, and some projects are even higher 3. Possible Paths for the Bottom of Rental Yield in Some Third- and Fourth-Tier Cities: Taking Huizhou, Yibin, and Fuyang as examples, with the per capita disposable income of urban residents in 2023 being 53,000, 47,000, and 41,000 yuan respectively, and the rental income ratio is about 12%. Based on the per capita disposable income of urban residents and the rental income ratio, we calculate the monthly mortgage payment they are willing to bear (considering that there is a relatively high housing supply, prices may be driven by buyers, assuming residents are only willing to bear the cost of rent as the monthly payment, i.e. monthly payment = monthly rent). Calculated based on a 30-year equal principal and interest repayment method, working backward to determine the total housing price, with the down payment as the sunk cost (homebuyers have a preference for residential properties), the bottom of the rental yield in cities like Huizhou, Yibin, and Fuyang may be around 3.03%-3.54%.

Looking at the rental yield of new, nearly new, and old dilapidated properties in typical areas of Huizhou, Yibin, and Fuyang, some older second-hand properties have already reached the bottom level of rental yield, while the rental yield of new and nearly new properties is higher compared to first and second-tier cities. We have selected new property projects with unit prices ranging from 7,000 to 14,000 yuan per square meter in the main urban areas and peripheral areas for analysis, all with the smallest three-bedroom layouts, and calculated that the rental yield is around 2%. Generally, the higher the unit price and the larger the area of the property, the lower the corresponding rental yield. Due to price reductions, some new property projects in Yibin have already achieved a rental yield of over 3%, with the rental yields of new, nearly new, and old neighborhoods basically meeting expectations.

Whether calculating the reasonable rental yield from the frictionless theory model or estimating the bottom of the rental yield in different cities or projects based on the possible homebuying decision logic of rigid demand families, we believe that the largest price decline in some cities may have already passed. 1) If we look at the housing prices in first and second-tier cities with rent as an anchor, the rental yield of some older residential properties is close to 2% or even exceeds 2%, indicating that the bottom prices of these properties have preliminarily formed, while nearly new and new property prices may face certain pressure. 2) Looking at the housing prices in third and fourth-tier cities with rent as an anchor, the rental yield in some cities has already reached a reasonable range of 3%-3.5% Some projects even approach 4%, due to the excessive overall inventory in some cities and the industry and population not meeting expectations, this may lead to certain cities facing pressure of falling rents and housing prices in the future. However, overall, we believe that the period when housing prices in some cities fell the most may have already passed, and prices are expected to move towards a bottoming process.

4 The emergence of the price bottom does not mean a reversal of the fundamentals, the key lies in the unchanged logic of residents' behavior

Under the impact of the subprime mortgage crisis, the Federal Reserve initiated an interest rate cut cycle, and mortgage rates also declined all the way from 2008 to 2012, with rental yields significantly higher than mortgage rates in 2011-2012. 1) From September 2007 to December 2008, the Federal Reserve cut interest rates 10 times, with the federal funds target rate dropping from 5.25% to 0.25%, and subsequently implemented three rounds of quantitative easing, keeping the federal funds target rate at an extremely low level for a considerable period of time, with the easing cycle not ending until the rate hike was announced in December 2015. 2) Starting in 2008, the fixed-rate 30-year mortgage in the United States also rapidly decreased following the benchmark rate, with rental yields beginning to exceed the 30-year fixed-rate mortgage in the first quarter of 2010, and in the first quarter of 2011, as the 30-year fixed-rate mortgage continued to decline, the difference between rental yields and mortgage rates also began to significantly widen. 3) In November 2012, the 30-year fixed-rate mortgage dropped to 3.3%, the lowest level since tracking this data began in 1971, at which point the rental yield rose to 4.75%, with a difference of 140bps between the two, reaching a peak after the subprime mortgage crisis.

Reviewing the trends of mortgage rates and rental yields after the subprime mortgage crisis in the United States, when rental yields were significantly higher than mortgage rates, coupled with low new home inventory, continued improvement in residents' employment, and income growth, it triggered residents to actively allocate real estate. 1) From 2008 to 2011, the 30-year fixed-rate mortgage in the United States continued to decline, with rental yields even exceeding the 30-year fixed-rate mortgage in the first quarter of 2010, but during this period, housing prices had not yet stabilized, and the number of new home sales was still declining. 2) In the first quarter of 2011, the difference between rental yields and mortgage rates also began to significantly widen, and in the first quarter of 2012, housing prices gradually stabilized. With mortgage rates at extremely low levels and low new home inventory for sale, the U.S. employment situation gradually improved, and residents' income improved, leading to a rebound in new home sales starting in 2012.

If the rental yield cannot significantly exceed the cost of holding a house, lacking the stimulus for residents to actively allocate assets to housing, then more policies tend to have a bottoming effect, which may be difficult to change residents' home-buying behavior. Looking back at China's real estate policies in 2014, policies such as relaxing home purchase restrictions and lowering interest rates were just bottoming policies. The policy that truly encouraged residents to actively allocate real estate and led to a significant increase in property prices was the monetization of shantytown redevelopment introduced in June 2015, bringing about a new round of urban expansion. Apart from the fact that in most cities, mortgage rates are still higher than rental yields, China currently also faces factors such as high housing inventory and slowing urban population growth, which may result in a lack of basis for stimulating residents to actively allocate residential properties in the short term.

5 Investment Recommendations

Wait for the emergence of the industry's right side. In the previous report, we specifically warned about the mutual squeeze between second-hand housing and new housing in 2024, which is already evident. The value of real estate enterprises mainly lies in the value of land reserves. When the fundamentals can repeatedly confirm that prices have bottomed out, it may be the comfortable "hitting zone" for the real estate sector. It is recommended to wait for the initial bottoming of prices and the emergence of the industry's right side. Focus on relatively certain opportunities: 1) Some real estate companies are the first to solve historical land reserve issues, with valuation centers expected to rise; 2) In the era of second-hand housing, intermediary companies with certain moats; 3) Urban village transformation.

Author: Dan Ge (Practitioner Number: S0360522110001), Source: Huachuang Real Estate Research, Original Title: "[Huachuang Real Estate | Industry In-Depth] Price Bottoming Out: A Possible Logic"