China’s Home Prices Continue to Slump

China has just released key home data. Prices of new homes, in the world’s second largest economy fell 5.7 percent in May. This is on an annual basis. There is a bright spot, the fall was less than what we saw in April, which was down 6.1 percent.

Home prices fell 2.3 percent in Shanghai and Beijing. This was less than the 4.7 percent fall seen last month. The worst seems to be over. Last August, we saw 39 cities in China show a one percent sequential price fall. At that point only once city was seeing home prices increase. Ahead of today’s release there was an expectation that the residential construction was not expected to add to china’s economic growth but it would be less of a drag on the gross domestic product (GDP) than anticipated. Especially less of a drag than what we saw last year.

Several cities like Shenzhen saw nice gains. Prices in Shenzhen were up 7.5 percent for the year now. New home prices were up 6.6 percent in the period of April to May.

China’s weak property market has been seen as a major drag on the GDP. Their GDP has now slowed down to a six year low of seven percent in the first quarter of 2015. This comes a new home demand has fallen. Data has shown this weakness would persist into the second quarter as well which has put more pressure on Beijing to step up its policy stimulus.

There has also been a slowdown of real estate investment growth through the first five months of the year. It is now at its slowest pace since May 2009. Inventory numbers are also very high. The People’s Bank of China (PBOC) has taken steps to stimulate their property market like cutting rates as well as the RRR requirements so commercial banks have more money to lend.

While this has been effective, the recovery has seen a dual pace. Tier one and two cities are seeing prices edge higher, but thanks to oversupply, are still at the bottom. This means, we are not seeing prices fall but a floor beginning to form after Beijing’s attempt to stimulate the real estate market. As a result, the PBOC has said it would step up investment in key sectors including renovations in shantytown, more infrastructure for rural power as well as urban transport. All of this should step up and support economic growth.