‘Contagion effect’: stark warning on home prices

Australia’s biggest bank says a ‘vicious cycle’ of home price falls could spread across Australia.

One of Australia’s biggest banks has redflagged a ‘contagion effect’ in the property sector as rescue plans are unfurled for giant developer China Vanke.

The Commonwealth Bank has warned that new home prices in China have fallen for nine consecutive months across 70 cities, with one of the biggest state-owned property developers already having to be rescued by the Chinese government.

CBA warned “the default of China Vanke has the potential to become a contagion event”.

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Confidence is taking a hit with new home prices falling across 70 cities in China. Picture: AFP/China OUT.

It said the firm – the second largest property developer in China by sales – saw a 53pc/yr plunge in contracted sales last month, its largest drop since 2018.

“Given negative new home price growth in China also adds further financial pressure to property developers, there is a vicious cycle playing out between the deteriorating credit conditions of property developers and falling new home prices,” CBA said in its Commodity Daily research released Monday.

“This negative feedback loop ultimately heightens the importance of policymaker and regulator intervention to improve the credit quality of China’s property developers. Chinese authorities intervened recently to ensure China Vanke avoided a default on its maturing dollar‑denominated bonds in Hong Kong on March 11. China Vanke is reportedly now in talks with 12 major banks, including state‑owned financial institutions, to provide a syndicated loan to meet upcoming repayments.”

CBA said it was too early to say if the rescue efforts will be successful.

The report highlighted “just how low homebuyer confidence remains in China”.

A model of the Fun City apartment complex developed by China Vanke Co – China’s second largest developer by home sales which has had to be rescued by the state. Picture: Tomohiro Ohsumi/Bloomberg

Its concern was the “vicious cycle” this placed the property and steel sector in, with potential collapses of developers and incomplete projects on the cards if sales continued to dwindle in the private sector.

“While it’s straightforward to see why falling new home prices make property a less appealing asset class, the ongoing concern that property developers may not complete projects due to credit issues has also weighed heavily on homebuyer confidence.”

CBA said “China Vanke is the first property developer to receive a government bailout in the current housing crisis. The treatment of China Vanke contrasts with major developers like Evergrande and Country Garden, who were allowed to default.”

CBA believes China Vanke was being rescued because its biggest shareholder is state-owned Shenzhen Metro compared to Evergrande and Country Garden which were privately owned – plus its fall was linked to drops in sales revenue not high leverage or risk taking.

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The property sector soaks up about a third of the steel produced in China. Picture: AFP/China OUT.

“While the bailout of China Vanke is a significant change in rhetoric for China’s government, it’s still too early to say that China’s property sector is at a turning point. With steel consumption in China’s property sector slanted towards the early stages of construction, we have higher confidence that property‑related steel demand will continue to remain subdued given a meaningful turnaround in the financial health of China’s property developers will be needed to boost new construction activity.”

CBA said about a third of China’s steel consumption was taken up by its property sector.

Home sales dropped by 0.36 per cent in February on average in most recent data, which was “not as severe” as December’s 0.45pc/mth contraction but “new home prices in China are showing little signs of improving,” CBA said.

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