Since mid-September, the real estate sector has continued to rise significantly, which is remarkable—the real estate sector in the Hong Kong stock market has accumulated a growth of over 64% since September 17. Strong gains of 19.71%, 10.49%, and 31.19% were recorded on September 26, 27, and October 2 respectively.

Looking at the 60-day increase, Ronshine China (03301) has achieved a growth of more than 3 times, Sunac China (01918) and China Jinmao (00817) have also doubled their gains. R&F Properties and Agile Group have achieved increases of over 90%, with almost all concepts showing a significant positive trend.

Under such an uptrend, one cannot help but exclaim "the real estate sector is heating up." Just as "there is no winter that won't be passed," since the real estate industry experienced frequent defaults in 2022 and officially entered a recession, the secondary market real estate sector has been cold, with contraction in valuation and stock price declines being common. Nowadays, with the continuous rise of the real estate sector, is the real estate sector really heating up?

Multiple factors resonate, and the trend of "stabilizing the decline" is imperative.

This surge in the real estate sector differs from the past, mainly due to the boost from both domestic and foreign factors as follows:

First, the continuous reinforcement of real estate policy measures coupled with a faster-than-expected decline in mortgage rates for existing homes, stimulating the real estate market to stabilize and recover faster.

Since September, five ministries including the Ministry of Housing and Urban-Rural Development, the Ministry of Finance, the Ministry of Natural Resources, the Central Bank, and the Banking Regulatory Commission have jointly issued a number of real estate easing policies, forming a combined force from various aspects such as monetary policy, fiscal policy, real estate finance policy, etc. The intensity of the policy releases, the intent of supporting the bottom, and the stimulus can be regarded as the most active easing cycle. Incremental information mainly includes special bonds used for the acquisition of existing land and real estate, monetization of 1 million urban villages, and approval of white-listed loans reaching 4 trillion by the end of 2024.

In comparison, the monetization of shanty towns and special bonds in 2017 also boosted market sentiment. Although the policy intensity this time is slightly lower than in 2017, mainly focusing on providing a floor, the core goal is to "stop the decline and stabilize". However, considering the significant inertia of the current market decline and the lag in policy implementation, if the market trend deviates from the policy goals, there may be further possibilities of easing measures being implemented.

It is evident that the current direction of real estate policies has been clear. The key in the future will be to push for the implementation of various policies. If policies continue to strengthen in the fourth quarter and the economy accelerates its recovery, the volume and price in core urban markets may bottom out and stabilize, thereby providing important support for the bottoming out of the national market.

At the same time, the recent unexpected reduction in loan interest rates for existing homes has undoubtedly further stimulated the real estate industry to stabilize faster. On October 25, national banks made batch adjustments to eligible existing home loan borrowers, with borrowers gradually receiving mobile text notifications from the lenders, confirming the successful adjustment of mortgage rates. Some borrowers saw a rate reduction of up to 130 basis points.

According to official initial statistics, as of October 28, 21 national banks have completed batch adjustments, with a total of 53.667 million transactions and RMB 25.2 trillion in existing home loan rates reduced, with legal person banks in various regions set to complete batch adjustments by October 31.

Regarding the adjustment of existing home loan rates, Wang Qing, Chief Macro Analyst at Orient Securities, believes that this policy release signals two things: boosting consumer spending and promoting the stabilization of the real estate market.

Secondly, if Donald Trump is reelected as the US President, his reaffirmed commitment to lowering interest rates may also have some stimulating effects on the real estate industry.

November 5 is the voting day for the US Presidential election, with many states allowing early voting. Currently, over 47.5 million American voters have cast their votes. From various current indications, the probability of Trump's reelection seems to be quietly rising. According to the authoritative forecasting model of the US Congress Mountain report, the probability of Trump's victory surpassed Harris for the first time on October 19, reaching 52%, while Harris fell to 42%.

The stock market's response is the most direct 'barometer'. KBW Regional Bank Index has risen by 10% in the past month, Bitcoin has also risen by 9%, and stocks of Trump's media and technology group have surged, outperforming the large caps completely.

This time, Trump aims to attract middle-class and working-class voters, especially those families who are suffering from high housing prices and high interest rates. Therefore, in order to win the favor of key swing states, he has repeatedly emphasized that if re-elected on November 5th, he will significantly reduce interest rates in the United States.

Looking at the multiple interest rate cuts in U.S. history, as interest rate cuts reduce mortgage rates, lowering the cost of home purchases for buyers, stimulating demand in the real estate market. Therefore, in each interest rate cut cycle, the real estate industry has shown a certain upward trend. For example,

In the early 1990s interest rate cut cycle, following this round of interest rate cuts, the United States entered the longest economic expansion in history, and the real estate market also showed a prosperous trend. During the interest rate cuts in 2020 amid the COVID-19 pandemic, to address the economic impact of the pandemic, the Federal Reserve took massive interest rate reduction measures, which also had a positive impact on the real estate market during this period.

However, there is also uncertainty. In the interest rate cut cycle of 2007 to 2008, the Federal Reserve made 8 consecutive significant interest rate cuts. During this period, despite the large rate cuts, the systemic risks caused by the bursting of the real estate market bubble had already formed, limiting the stimulus effect of interest rate cuts on the real estate sector. Overall, historically, interest rate cuts in the United States have brought considerable boost to the real estate sector.

Furthermore, after the interest rate cuts in the United States, our country usually follows suit in cutting interest rates, because we need to watch the interest rate differential between China and the U.S. If interest rates are cut too quickly, it can cause a large outflow of foreign capital, while cutting rates too slowly will provide opportunities for foreign capital arbitrage. Therefore, the chain effects involved will also have a certain boosting effect on the domestic real estate market.

Is it worth investing in the current real estate sector?

Under the catalysis of the above multiple factors, the real estate industry's sales data are clearly showing improvement.

Since late September, first-tier cities have welcomed the long-awaited peak property sales season, with both new and second-hand property transaction areas increasing, reaching the highest point of the year so far. Benefiting from reduced supply, the current inventory of properties for sale has decreased. With the expectation of a more vigorous loosening of stimulus policies in the future, both supply and demand sides are expected to strengthen, and the volume of real estate market transactions is likely to stabilize.

For new properties, according to Ke Chuai, first-tier cities directly benefit from policies, with overall transactions maintaining high levels. From the 1st to the 20th of October, transactions increased by 11% year-on-year; whereas second-tier cities have not introduced new real estate policies, leading to a 9% year-on-year decrease. Front-end indicators for new properties in Beijing, Guangzhou, Shenzhen, and other cities show steady growth in visits and subscriptions, indicating that the heat of new property transactions may continue for some time.

For second-hand properties, from the 1st to the 20th of October, the number of second-hand property transactions in Beijing/Shanghai/Guangzhou increased by +38%/+70%/+86% year-on-year respectively. Second-hand properties have greater flexibility and are more popular than new properties. The heat of second-hand property transactions in second-tier cities is moderate, with only Hangzhou showing a significant increase of +105% year-on-year. Overall, the pulse market is expected to continue throughout October.

Does the marginal improvement in the above sales data mean that the real estate sector, which may have hit bottom, will usher in an upward turning point and become a topic worth focusing on in the secondary market in the near term?

Sinolink Securities stated that the real estate market in October after the new policies may present a situation of recovery. Subsequent attention needs to be paid to the sustained impact of the market heat, as well as the implementation status of physical work such as receiving and storing properties, and the transformation of dilapidated houses in urban villages into monetized resettlement.

If core cities can continue to send out positive signals for market stabilization, it is expected to boost confidence, improve expectations, and truly bring about a turning point in real estate stabilization. The real estate sector is expected to see a recovery in valuation and performance. It is recommended to focus on leading targets benefiting from the gradual stabilization of the industry: real estate development companies recommended focusing on cities with high energy levels and improving product offerings, such as Greentown China, Yuexiu Property, Hangzhou Binjiang Real Estate Group; intermediaries recommended benefiting from continuous policy advantages, with the first and second-hand property markets becoming more active, and having core competitive advantages in intermediaries like KE Holdings; property companies recommended stable property management, leading commercial management, and actively dividend China Resources Mixc. It is recommended to pay attention to city investment companies benefiting from localized debts, as well as to flexible targets involved in mergers and acquisitions.

Huachuang Securities also pointed out that recent real estate support policies have been frequent, and the core of effective policies is to solve the current supply-demand imbalance issue with funds that can bear losses, easing local debt pressure to create conditions for stable real estate. With optimistic expectations under the requirement of "stabilizing after the decline," it is expected that there will still be policy attempts, focusing on the second round of policy game opportunities.

Based on the above, it can be seen that the initial effects of this round of real estate policies have been reflected. However, there are still many issues in the current real estate fundamentals that need to be resolved. Haitong Securities stated that on the one hand, there is still pressure for housing prices to fall, with the current increase in volume more likely to be 'trading volume for prices.' On the other hand, inventory remains high, and the destocking cycle remains lengthy. This means that there are still significant risks for real estate enterprises, which continue to drag on the economy.

However, there is no doubt that due to the pivotal position of the real estate industry in the economy, boosting the real estate market is undoubtedly an imperative measure for achieving true economic recovery.

Specifically, the real estate industry is an important pillar of the national economy, connected to many upstream and downstream industries, solving a large number of employment issues, and driving the development of related industries. For example, industries such as construction, building materials, and finance are highly dependent on the prosperity of the real estate market. Therefore, fluctuations in the real estate industry will have chain reactions on these industries, thereby affecting the overall economy. Due to the pivotal position of the real estate industry, changes in the economic environment, and policy adjustments collectively contribute to the phenomenon that when the real estate sector is stagnant, other industries also find it difficult to grow rapidly.

From the perspective of valuation repair, the real estate industry has a relatively large market capitalization in the stock market. If real estate stocks undergo valuation repair due to improvements in the industry, it will have a significant upward pull effect on the stock market index. At the same time, the valuation repair of real estate stocks will also change the market's risk preference, making investors more optimistic about the overall stock market.

Therefore, it is not difficult to see that with the frequent introduction of policies and some visible positive changes, the entire real estate industry has already confirmed a short-term bottom and has conditions for an upward rebound in the medium to long term. Once the medium to long-term fundamentals reverse, stock prices will naturally follow suit.