China Real Estate Developers:NBS report indicates tightening effectiveness;not a signal to buy

News.

    National Bureau of Statistics (NBS) has released its 70 cities price index forSep 2016. It included a special announcement of 1H Oct price and volumeperformance in the top 15 cities, something it has never done before.

    According to NBS, the mom growth rate in property prices has alreadydropped 2.5ppt on average from the Sept level in these 15 cities, post astronger than ever single month price increase in Sept, mom. Meanwhile, italso indicated that among the 15 cities, the transaction volume declined by60-80% from the 2H Sept level in 4 cities, 40-60% in 3 cities and 20-40% inanother 3.

    Analysis.

    Although the volume weakness suggested by NBS data is largely in linewith the reading from CREIS that we track on a weekly basis, we believeprice weakness seems overstated based on anecdotal evidence we havecollected from agencies and developers. Meanwhile, based on theexperience of past cycles, the effectiveness of tightening on prices wouldonly start to appear after at least 5-6 months and the majority of tighteningin the recent cycle occurred just 2 months ago. Also, this round ofmortgage tightening (which we think will have greater impact than homepurchase restrictions) is still looser than the peak level in 2013, except forHefei, Nanjing and Suzhou.

    Implications.

    We believe the NBS announcement may be seen as the governmentindicating it believes its tightening measures have been successful andtherefore that it will unlikely escalate tightening or even loosen soon. Wethink it is too early to jump to such a conclusion. After all, other than NBS,there are multiple channels for us to monitor whether the overheated citieshave sufficiently cooled down so that prices would not rebound tooquickly. We also believe if there is any retreat from tightening by thegovernment at this point, property prices might rebound at an even steeperpace, which would force the government to adopt harsher tighteningmeasures later, potentially leading to greater market volatility. Withuncertainties related to government policy direction rising, we do not seethis as a signal to buy yet.