Purchase intention for the next 2 years dropped sharply, while no purchase intention jumped
Significant weakening of market sentiment and home purchase intention
The latest UBS Evidence Lab China housing survey (conducted in April 9-22 2020) showed a significant weakening of market sentiment and home purchase intention. Respondents' purchase intention in the next 2 years declined sharply from 35% one year ago to 21%, while a record number of respondents said they had no intention to buy a property. COVID-19 outbreak and related lockdowns not only hit property transactions, but also hurt respondents' income outlook and confidence in the property market. Consequently, almost 80% of respondents that originally had home purchase plans in the next 2 years decided to delay or cancel their plans, more pessimistic than the results from UBS Evidence Lab's Consumer PulseCheck survey.
Mortgage, income and housing price are top factors affecting sentiment
Respondents cited lower down payment, lower interest rates and easier access to mortgage among top factors to boost confidence, along with job promotion or salary increase. Meanwhile, housing price rising too fast is cited among top factors that would reduce confidence while a lower price would induce more buying. It seems that a significant cut in mortgage down payment requirement and/or rates may boost property sales meaningfully, though this is not our base case forecast.
....and cause Softline earnings to fall well below consensus:
Widespread permanent store closures would probably be highly disruptive to the entire industry. We envision an unprecedentedly large build-up of excess inventory putting even more pressure on Softline industry gross margin and take 4-8 quarters or more to clear. We note April apparel consumer price index (CPI) fell 4.7%, one of the largest drops ever, likely based only on the inventory build since mid-March. We think broad-based permanent store closures would extend the timing of the recovery into CY21 and possibly CY22. This would be past what the market expects and a key reason our EPS estimates are well below consensus for most stocks we cover. We continue to expect pressure on Softline stock prices.
Property sales are recovering, and some modest positive news ahead
China's total property sales volume dropped by 26%y/y in Q1 2020, but high frequency data showed 30 major cities' property sales are close to the level in 2019 in early May. Recent hukou reform and old-town renovation could help support property demand modestly. Easier liquidity coupled with lower mortgage rates and easier access to mortgage may provide support for the property market, even as weaker income growth serves as the main negative factor. In addition, the government announced plans to renovate 7 million old-town homes in 2020, double that in 2019, which could support property investment modestly even as shanty town renovation weakens.