Since 2006 there has been a substantial slowdown in new home investments. Our calculations suggest that structural growth in new home investments could already have declined below 7%.
The structural slowdown mainly reflects that the pace of urbanisation has peaked in China. However, excess supply has also added to the structural slowdown as construction of new homes has been slow to respond to the structural slowdown in demand for new homes.
Nonetheless, at least 70% of the decline in new home investments over the past year appears to be cyclical and can largely be explained by tighter financial conditions.
There should gradually be less headwind from the housing market in the coming quarters as financial conditions have so far eased in 2014.
However, the recovery will be weak as financial conditions have only eased slightly and the structural slowdown will continue to weigh on new home investments.
Despite the structural headwinds we still think an interest rate cut would be an effective tool to boost the housing market in China.
To Read the Entire Report Please Click on the pdf File Below