A Key Driver of Home Sales in China Just Hit the Brakes

(Bloomberg) -- Sign up for our new China newsletter, a weekly dispatch coming soon on where China stands now and where it's going next.

Several Chinese provinces have unveiled sharply lower shantytown redevelopment targets for 2019, suggesting one key driver of home sales may be on the wane.

From Sichuan to Shanxi, targets to replace older, rundown dwellings with new, affordable housing have fallen as much as 74 percent from 2018, Bloomberg calculations based on local government data show. UBS Group AG property analyst John Lam estimates the national target may this year be pared back by 14 percent to 5 million units.

Beijing's shantytown redevelopment drive, part of China's fight to alleviate poverty, had been fueling robust demand for new residential properties over the past three years. People were often given cash handouts to buy new apartments on the private market, and such transactions may have contributed to more than one-fifth of home sales in 2017, China International Capital Corp. wrote in December.

Read More: China's Neighborhood Cash Drop Pumps $500 Billion Into Economy

China's central government in October began asking local authorities to cancel cash handouts in cities where home prices had surged. A reduction of the redevelopment targets themselves may intensify a property slowdown that's already prompted China International Capital Corp. to call a “year of recession” in 2019.

HSBC earlier this month identified 16 cities with the highest risk profiles, based on elevated loan-to-deposit ratios. It noted that the average household loan-to-deposit ratio in China had increased from 37 percent in January 2012 to 63 percent as of June last year.

“Local redevelopment targets are clearly linked to home price trends,” said Yan Yuejin, a Shanghai-based analyst at China Real Estate Information Corp. “All the targets announced so far appear to be a cut from last year, and more such reductions will come.”

--With assistance from Adrian Leung.

To contact Bloomberg News staff for this story: Emma Dong in Shanghai at edong10@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Paul Panckhurst

©2019 Bloomberg L.P.

With assistance from Bloomberg