CHINA’S housing market has been identified by some as the biggest risk to the global economy. There is unfortunately little independent data — apart from apartment sales and new project starts — to help us assess what is really going on, or what developers plan to do in terms of land purchases and price cuts. Our quarterly survey of developers attempts to fill that gap.

In June and July, we spoke to 30 senior managers in six cities (Hangzhou, Lanzhou, Baoding, Foshan, Huangshi, and Nanchong) and asked them 52 questions about what they were seeing then and what they expected in the near future. Most of them are small, unlisted developers.

Construction

Construction activity continued to moderate in the second quarter of 2014. More than half of the 30 developers we surveyed (Phase 10 of our survey) reported no change in the scale of their construction activity during the previous three months. Five reported less activity, up from two in our previous Phase 9 survey. In the next three months, eight said they would build more, down from 15 in Phase 9. The number reporting that they were seeing peers slow building activity continued to rise in the latest survey, to 24 out of 30. The amount of land that developers have under construction is also down.

Why the deceleration in construction? Our surveyed developers believe the market is in the doldrums, sales are stagnant, and the near-term outlook is not good. Some also noted rising financing costs. Even those that had increased their construction activity cited rising financing and land costs as a concern.

Progress on social housing construction is still slow, despite the big push from the central government. Financing seems to be a challenge, according to the developers.

Funds released under the Pledged Supplementary Lending (PSL) facility by the People’s Bank of China to China Development Bank should help, but it is unclear how quickly these funds will be disbursed.

Land

China’s land market is clearly cooling. The number of land parcels released by city governments is falling, according to our developers. Thirteen respondents reported less land being released for sale in the previous three months and seven reported a lot less — much higher numbers than in recent phases of the survey. Developers’ appetite for buying land has also ebbed: 16 developers reported that their local peers had become less keen on buying, up from six in Phase 8.

Twenty-one of our 30 surveyed developers said they did not intend to buy any land in the next three to six months, continuing the recent trend.

Land price growth has slowed. Thirteen developers reported flat land prices and seven reported declines of up to 10 percent in the previous three months. The developers say they expect prices to remain flat in the next one to two quarters.

Apartment sales

Apartment sales are deteriorating, even with discounts. Eighteen of our developers said that they believed their peers’ sales had deteriorated, the highest number since Phase 5 in early 2012. While 12 of the developers reported flat sales compared to three months earlier, 10 experienced a decline and five reported a 20-30 percent drop. Our developers say that 39 percent of their projects launched this year have been sold, while the ratio is 50 percent for all projects they are still selling.

Purchase incentives are now widespread in the cities we surveyed. Seventeen developers reported that they believed 70-90 percent of their peers were offering such incentives, mostly price discounts, as well as gifts (such as home decoration, car parking spaces and furniture) and lower down-payment ratios. Even with these inducements, 16 developers said they were less confident than three months ago.

Apartment prices

Apartment selling prices have moderated, according to our developers. We focus on the new home market. Eighteen of our 30 developers reported that other developers in their cities are offering discounts on newly launched projects to attract buyers — eight more than in Phase 9. Among them, most are offering price cuts of up to 10 percent.

Echoing this, 11 of our surveyed developers reported offering price cuts of up to 10 percent in the past quarter, and three offered bigger discounts. However, the price outlook is stable. Fourteen of the 30 developers expect flat prices in the next quarter, while seven expect continued mild price moderation. None expect a material price correction. Most believe a reversal of market sentiment is more important than discounts in turning the market. A number of our developers argued that it does not matter how much they cut prices, buyers are still very cautious.

Developer financing

Financing conditions for developers have been tight in recent months. Instances of default still appear uncommon, but the situation is worsening, according to our developers.

Twenty-two respondents reported they believed their peers were nervous or worried about their cash positions, eight more than in Phase 9. Four believe that if sales do not improve, bigger problems will emerge.

Defaults do not appear common, though. Most of our respondents had not heard of any cases. Delays in payments to suppliers are more common than delays in payments to city government and creditors.

Also, half of our respondents had heard of developers looking to sell land to raise cash, a higher ratio than in previous surveys.

Bank and trust loans are the two main sources of funding for most developers.

Funding access: Most of our developers said they were finding it more difficult to access funding from both of these sources. Twenty-six reported that it was harder to obtain bank loans now than three months earlier. For trust loans, 10 said the situation was roughly the same, while 19 reported that access had become more difficult.

Funding costs: Costs are rising, more obviously for bank loans (interest rate of 12.3 percent in the latest survey, up from 8.7 percent in Phases 8 and 9). Trust loans are still expensive, at around 17.6 percent.

We also asked about mortgages extended to buyers of our developers’ projects. The People’s Bank of China recently asked commercial banks to extend more loans to, and accelerate mortgage approvals, for first-home buyers. This does not appear to have translated into change on the ground. Twenty-three of our developers said they did not feel banks had eased. Banks charge mortgage rates of about 6.7 percent to first-home buyers and 7.3 percent to second-home buyers, according to our respondents.

Policy expectations

The developers we surveyed expect further policy loosening. The rhetoric has changed: The central government now has a greater tolerance for the easing of purchase restrictions by cities. Fourteen of our developers expect an even looser policy stance in the near future, compared with four in Phase 9, and 15 expect no change. If policy is kept unchanged, most expect a continued mild price correction (up to 10 percent) and a few local developers to go bust.

Fifteen cities have officially confirmed that they will abolish or loosen purchase restrictions.

A difficult index

The China Developers Sentiment Index (CDSI) is a diffusion index; a reading above 50 indicates an expansion. The index is derived from the results of our surveys on construction, sales, pricing, financing and the policy outlook. It fell sharply to 45 in Phase 10 from 56 in Phase 9. This was the worst deterioration in the history of the index, and also a poor reading in absolute terms.