What are the new changes in the first-tier real estate market after the implementation of the policy 'Recognize the Property, Not the Loan'?

The "Recognize Housing, Not Loans" policy has been fully implemented in first-tier cities for over half a month. What is the effect? Will there be more powerful policies introduced?

Since the end of August, the "Recognize Housing, Not Loans" policy has been fully implemented, and restrictions on home purchases have been lifted in core areas of second-tier cities such as Nanjing, Jinan, and Qingdao. After the introduction of this new round of policies, investors are highly concerned about the implementation effect.

According to estimates by analysts such as Bian Quanshui from West Securities, the full implementation of the "Recognize Housing, Not Loans" policy can increase the year-on-year growth rate of national residential sales by approximately 1.0, 0.7, and 0.3 percentage points in 2023.

West Securities believes that the "Recognize Housing, Not Loans" policy essentially falls within the scope of encouraging leverage in the residential sector. In the next 1-2 months, it is necessary to closely monitor the recovery of the first- and second-tier, as well as the national real estate market sales. If the recovery falls short of expectations, the first round of policies will only have a temporary stabilizing effect, and there is a possibility of further expansion of the optimization boundaries of the first-tier policies.

In a report on September 17, West Securities answered several key questions:

What is the current level of second-hand housing listings in first-tier cities, and is there any downward pressure on housing prices?

After the full implementation of the "Recognize Housing, Not Loans" policy, the number of property viewings for second-hand homes in first-tier cities increased significantly in the week of August 28 to September 3, with a week-on-week increase of +16.1%, +15.4%, +9.1%, and +13.9% in Beijing, Shanghai, Guangzhou, and Shenzhen, respectively. In the second week, there was a slight decline, but it remained higher than the pre-policy level. In the week when the policy was implemented, the index of second-hand homes listed for sale in first-tier cities increased by 58.8% compared to the previous week. The increase in new listings was significantly lower than the backlog of demand released after the Chinese New Year in February and March this year, and the number of new listings began to decline in the second week, without further increase. In addition, the prices of second-hand homes temporarily stabilized due to the supply-demand dynamics.

In terms of listing volume, Wind data shows that in the week when the policy was announced, the index of second-hand homes listed for sale in first-tier cities increased by 58.8% compared to the previous week. However, the increase in new listings was significantly lower than the backlog of demand released after the Chinese New Year in February and March this year, and the number of new listings began to decline in the second week, without further increase. As for listing prices, there was no significant change in the index of listing prices in the first week after the policy was implemented, which remained basically unchanged from the previous value. In the second week, there was a slight increase of 0.3% compared to the previous week. The performance of second-hand housing prices temporarily stabilized, which may be related to the weakening willingness of sellers to reduce prices after the policy was announced and the insufficient release of buyer demand.

West Securities believes that there is insufficient momentum for short-term upward movement in second-hand housing prices, and there is no significant downward pressure under the protection of policies. It is expected to remain stable.

Specifically, after the policy was implemented, the transaction volume of second-hand homes in first-tier cities steadily increased, and there were certain differences in the performance of the second-hand housing markets in different cities, with Beijing performing better than Shenzhen.

According to data released by the Beijing Municipal Commission of Housing and Urban-Rural Development and the Shenzhen Housing and Construction Bureau, the transaction volume of second-hand homes in both cities has steadily increased after the policy was announced. In the week of August 28 to September 3 and the second week of September 4 to September 10, the number of second-hand residential transactions in Beijing was 2,692 and 2,780, respectively, with a week-on-week increase of 5.5% and 3.3%. In the third week of September 11 to September 17, the transaction volume continued to increase. The transaction volume in the first 5 days continued to increase, surpassing 3100 units, with a 24.6% MoM growth compared to the second week. In Shenzhen, the number of transactions decreased by 13.8% in the week when the policy was relaxed; it only started to rebound in the second week, with a 22.6% MoM increase. In the first 5 days of the third week, the transaction volume continued to rise, with an 11.6% MoM increase, but it performed worse than Beijing. Considering the lag in the registration data, it is expected that the transaction volume of second-hand houses in first-tier cities will continue to increase in the short term, but the sustainability remains to be observed.

Has there been any change in the new housing market? Have house prices increased to a certain extent?

From daily and weekly data, except for Beijing, where the new housing market has shown signs of continuous recovery recently, other cities have not significantly increased and have basically maintained the pre-liberalization level of transactions. Apart from the time required for the demand for replacement brought by the increase in the number of second-hand houses listed, there may also be a certain correlation with the recent changes in the supply of new houses.

In terms of prices, there is also differentiation in the prices of new houses in first-tier cities, with prices in Beijing and Shanghai stabilizing and rising, while prices in Guangzhou and Shenzhen remain relatively stable.

Data released by the China Index Academy shows that in the week when the "buying a house without a loan" policy was implemented, the sales prices of new residential buildings in the four major first-tier cities all increased to varying degrees. However, due to the possible large differences in transaction prices of newly listed projects in the new housing market each week, such as the time difference between projects in the core area and the suburbs, the weekly price data of new houses may fluctuate greatly, making direct comparison inconvenient. If the weekly data is smoothed (taking a 4-week moving average), the MoM price increases of new houses in Beijing, Shanghai, Guangzhou, and Shenzhen in the 36th week (8.28-9.3) were 1.8%, 9.4%, -1.4%, and 0.5% respectively, and in the 37th week (9.4-9.10) the MoM price increases were -0.4%, 0.2%, 3.0%, and 0.7% respectively. Among them, the prices of new houses in Beijing and Shanghai have shown a stable and rising trend in recent weeks, while the prices in Guangzhou and Shenzhen have remained relatively stable, reflecting the differentiation of housing prices in the first-tier market this year.

How sustainable is the effect of the new policies in the first-tier housing market?

The "buying a house without a loan" policy essentially still belongs to the category of encouraging residents to increase leverage. After 2008, China's sales of residential buildings have experienced 4 rounds of bottoming out and rebounding, each accompanied by a rapid increase in the leverage ratio of residents. The willingness of residents to increase leverage is mainly based on expectations of income growth and house price increases, both of which are currently at historically low levels.

From the market performance after the implementation of the new policies in the first-tier cities, it can be seen that in the short term, there is a situation of "increased volume and stable prices". From a logical analysis, the replacement demand is the main force behind the policy support enjoyed by the first-tier cities in this round. For the local residents in the first-tier cities who engage in "selling one and buying one" for replacement, they must first complete the "selling one" in order to be recognized as first-time homebuyers when they "buy one". However, the problem lies in the fact that the prerequisite for initiating the housing replacement chain is to have sufficient demand to absorb the supply brought about by the "selling one". In order to penetrate to the bottom level, there must be an influx of rigid demand in order to activate the entire housing replacement chain. Otherwise, the additional supply of second-hand houses cannot be absorbed.

After the implementation of the new policies, the report believes that the incremental rigid demand in the first-tier cities mainly comes from those who have a record of housing loans in other places, meet the conditions for purchasing homes in the first-tier cities, and plan to buy properties in the first-tier cities. The specific scale of this group is unknown, but it can be roughly inferred from the recent decline in the number of house viewings for second-hand houses and the backlog of listed properties that the capacity of the incremental rigid demand to absorb the new supply of second-hand houses is relatively limited, indicating that the purchasing power of rigid demand is insufficient.

From another perspective, the outflow of permanent residents in the first-tier cities occurred for the first time last year, and the overall number of births and marriages in the local area has been declining in recent years, which will also restrict the expansion of rigid demand.

What is the impact of the "property recognition, not loan recognition" policy on the national real estate market?

According to data from the Shell Research Institute, the sale of old properties to buy new ones contributes significantly to the local new housing market in first and second-tier cities, with an average of 53% in first-tier cities and 21% in second-tier cities. Based on our calculations, the sales area of newly built residential properties achieved through the sale of old properties to buy new ones in first and second-tier cities nationwide in 2022 is approximately 83 million square meters. Among them, the sales area in first-tier cities is about 18 million square meters, and in second-tier cities is about 65 million square meters.

Due to differences in the real estate market situation and the timing of policy implementation in different cities, there are significant differences in the performance of the property market after the implementation of the "property recognition, not loan recognition" policy. Four months after the policy was relaxed, Hangzhou performed well, followed by Tianjin, and Zhengzhou performed the worst.

Western Securities believes that after the comprehensive implementation of the "property recognition, not loan recognition" policy, it is expected to have a stronger boosting effect on the real estate market in first-tier cities than in second-tier cities. Assuming optimistic, neutral, and pessimistic scenarios, the year-on-year growth rate of sales area of residential properties in first-tier cities is expected to increase by 30, 20, and 10 percentage points respectively in the 4 months after the implementation of the "property recognition, not loan recognition" policy, while in second-tier cities, the growth rate is expected to increase by 15, 10, and 5 percentage points respectively. Under the three scenarios of optimistic, neutral, and pessimistic, it is estimated that the year-on-year growth rate of sales area of residential properties nationwide in 2023 will increase by 1.0, 0.7, and 0.3 percentage points respectively.

Will there be more aggressive policies implemented in first-tier cities?

The overall optimization of the current real estate policies has exceeded market expectations. This includes continuous interest rate cuts and reserve requirement ratio reductions at the central bank level, the widespread reduction of down payment ratios for first and second homes at the national level, as well as the implementation of the "property-based lending" policy in first-tier cities and the relaxation of purchase restrictions in core areas of second-tier cities. These policies themselves are not insignificant, but given the current macroeconomic expectations and the significant downward pressure on the real estate market, the effectiveness of these policies still needs to be further observed.

West Securities believes that in the next 1-2 months, it is necessary to closely monitor the recovery of the real estate market sales in first and second-tier cities, as well as nationwide. If the recovery falls short of expectations, the first round of policies will only have a temporary stabilizing effect, and there is a possibility that the boundaries for further optimization of policies in first-tier cities may expand.

The relaxation of criteria for affordable housing, the adjustment of loan interest rates, and the reduction of down payment ratios are all within the scope of policy considerations, but the probability of a comprehensive relaxation of purchase restrictions is not high.