FOLLOWING a sharp decline in housing starts and deceleration in sales in this year’s first quarter, property activity stabilized tentatively in the second quarter. New property starts narrowed their decline to 11 percent year over year in the second quarter from 25 percent in the first quarter as sales fell less steeply in May and June, helped partly by a more favorable base effect.

Completions also rebounded by 24 percent year on year in the second quarter. More recently, new starts grew by 8.2 percent year on year in July, returning to positive growth for the first time this year, even as sales weakened further to contract 16 percent year on year in the same month. Policy relaxation, meanwhile, has yet to deliver sustained improvement in sales volume. Property prices have softened further amid weak sales, with an increasing number of cities experiencing price decline.

What drove the rebound in new property starts? First, following the 25 percent cut to new starts at the start of this year, it is possible that developers have regained some degree of calm as the government intensified its “mini-stimulus” and relaxed property-related policies. Second, after 2013’s massive land acquisitions, developers may be coming under pressure to launch new projects. More importantly, we think the new starts number includes social housing starts, including shantytown renovation, which has been boosted by the government’s big policy push and increased financing support since spring.

More infrastructure investment

In addition to stabilizing property activity, the government’s policy support has also boosted infrastructure investment. As economic indicators showed signs of picking up in recent months, and as property and macro policies were increasingly eased, market sentiment has improved as well. Some market participants believe the worst of the property downturn may be behind us, and that expected further policy easing should help secure sales and construction growth in the coming months.

Since May, as the government intensified its mini-stimulus and policy support for the economy, property-related policies have been gradually eased, accelerating in particular since July. Home purchase restrictions in over three-quarters of cities reportedly have been relaxed to some extent; some provinces and cities have announced tax subsidies; use of housing reserve funds has been relaxed; hukou policies have been loosened; purchases of commodity housing for social housing purposes allowed and encouraged; and procedures or fees for developers eased in a bid to boost property sales and construction.

While the central government has not formally eased property-related credit nor cut down payment requirements on home mortgages, media reports suggest that mortgage borrowers are finding it easier to obtain credit and discounted rates in some localities.

What more can the government do? Going forward, it can and may indeed formally cut the still high down payment requirements for home buyers (30 percent for first mortgage and 60 percent for second) and further relax hukou policies to help boost property sales, if property activity slows further later this year or in 2015. In addition, mortgage interest rates may be cut independently or as part of an overall rate cut package sometime down the road.

In addition to policies supporting private commodity housing, the government has put more effort into supporting social housing provisions. The government revised up its social housing target earlier this year to 7 million units of new starts (of which 4.7 million units will come from shantytown renovation), and more importantly, has taken various measures to boost financing for and actual construction of social housing, especially via shantytown renovation.

Such measures include faster fiscal disbursement, more reliance on the China Development Bank (including the use of on-lending) to provide policy financing, and providing subsidies (at various local government levels) to private developers to engage in social housing construction. Loans for social housing have increased significantly in the first half of 2014, with more to come in the second half, largely provided by the CDB.

Modest improvement expected

We expect a modest improvement in both property sales and housing construction in the next few months on the back of increasing policy easing and credit support.

For property sales, the relaxation of home purchase restrictions, the recent drop in home prices, which has increased affordability, easier and cheaper mortgage credit availability, potentially faster push for hukou relaxation policies in some cities, and purchases of commodity housing by local governments for social housing supply should all help.

For property construction, developers facing financing difficulties amid deteriorating cash flows may speed up sales volume to increase turnover. We also expect developers to accelerate construction in preparation for higher sales in the coming September and October “golden season.” In addition, new starts and construction will likely be boosted by accelerated social housing construction and shantytown renovation.

Recent property and policy developments in China are aligned with our earlier forecast, which had already assumed a modest improvement of property activity during the summer and fall months of this year, thanks to the gradual easing of policies to support growth.

Our 2014 forecasts had already factored in a drop in sales of 0-5 percent and a decline in starts of 10-15 percent. Indeed, during the first seven months of this year, property sales contracted by 7.6 percent year on year as new starts declined by 12.8 percent year on year.

We reiterate: We expect China’s recent policy easing to help improve property sales and construction in the near term. Moreover, we have already assumed that additional easing will come in the next two or three quarters, including possible cuts to China’s down-payment requirement and mortgage rates, and easing of credit to developers.

However, while policy tailwinds will likely support sales and construction in the near term, we do not think they can revitalize the property sector or reverse the structural downshift. After the “golden season” passes, sales will likely slow again and drop by 5-10 percent in 2015.

We also expect new commodity property starts to decline by another 10 percent next year as the momentum generated by the policy push for social housing construction fades.

Consequently, we expect overall construction to slow further next year, and for the negative impact of China’s property downturn to weigh more heavily on the economy by end-2014 and in 2015.

Our current forecast of around 7.3 percent GDP growth this year and 6.8 percent in 2015 has already taken into account a short-term stabilization in property sales, as well as the expected ongoing drag from a lackluster property construction running through 2014 and into 2015.