How the crisis in the Chinese real estate market is weighing on the economy

Text size

House prices have plummeted in China, developers have defaulted on debt and many homes are still unfinished.

Wang Zhao/AFP via Getty Images

With Beijing stepping in to help China’s beleaguered property market, many believed the sector’s slump could be averted. New situations lead us to reconsider this optimism.

After years of prosperity, real estate prices are experiencing almost unprecedented declines. New home prices in June fell for the 10th consecutive month, even as the government adopts measures to support the sector.

More than 30 Chinese developers have defaulted on their dollar debt or have pushed back bond maturities because they cannot sell new offshore debt,

German Bank
it is

Owen Gallimore Told The Wall Street Journal.

Various Chinese analysts Barrons Respondents gave various reasons why the real estate market, at best, needs further reforms, at worst, is heading for a deeper crisis.

Huang Qifan, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress, told Chinese media that further construction should essentially stop.

“China doesn’t need new construction,” he said. Many units are vacant investment properties for citizens who already have primary residences, but China’s population has peaked and will begin to decline rapidly. Construction and renovation of public facilities such as schools and hospitals are mostly complete, he said.

Last week, Chinese media quoted other analysts as saying that real estate demand in China had peaked over the next decade, mainly due to an aging population, as has happened in Korea and Japan. Repeated demographic studies have concluded that China is headed for a demographic crisis, with too many elderly citizens, a shrinking pension system and not enough new births to support taxation and social incomes in the near future.

For Ting Lu, chief economist of China for

nomura
,

there is a vicious circle in the Chinese real estate sector.

The main problem is a simple crisis of confidence among potential buyers because they don’t even believe the units will be finished. A widespread mortgage boycott among home buyers has recently worsened the crisis. Depending on the extent and duration of the boycott, refusal to pay could devastate the sector, as purchases of new homes account for more than 80% of China’s real estate sector.

This adds insult to injury, as private developers fund new projects using 50% of their revenue from new home sales, Lu said. “The continued contraction in new home sales will further reduce funding. developers and make it even harder for developers to build homes,” he said. Barrons.

But the problem does not end there. In China, 30% of local authority revenues come from land transfers. As home sales fall, developers buy less land, which can crush municipal revenues. This translates into government downsizing or staff salaries – “a social class with relatively stable incomes and demand for housing, leading to even lower new home sales in these cities,” said Read.

Developers and local governments aren’t the only ones suffering.

“If this recovery in sales and financing does not materialize, developers could impose on investors deep haircuts on their bond holdings and long term extensions, to manage their heavy debt burden,” wrote the S&P analysts. Global in a note on Monday.

“The end of the beginning is near for Chinese Developer Defaults. Initially, companies asked investors to swap or extend defaulted bonds, in order to buy time until the housing market recovers. In the next stage, we assume that investors will lose patience with such postponements, especially if home sales do not recover quickly,” they added.

National authorities have intervened by easing credit and easing requirements for mortgages and other conditions for home ownership. Localities have reduced mortgage interest rates and reduced down payments.

But these seem to be losing the battle against the myriad forces depressing the sector.

For

the morning star
it is

Cheng Wee Tan, senior China real estate analyst, said: “The effectiveness of mortgage rate cuts is limited by lockdowns, with limited impact on consumer sentiment; reopening and picking up buyer sentiment is more critical in our view,” he said. Barrons.

For Lu de Nomura: “We still do not see a rapid and strong recovery of the real estate sector in 2022 due to the new highly contagious variants of Covid-19, the reduced confidence of Chinese households, the anticipated demand for new housing in 2015 – 2018 in lower-tier cities, and the vicious circle mentioned above.

On the stock market implications, Morningstar analysts were bearish on the sector and the effects of government action, but said the current situation offered small buying windows. They prefer public developers in China, “who have strong balance sheets to take market share from private developers,” they said in a note on Wednesday, citing

Land and Overseas Investment in China

(688.Hong Kong) for example.

Penny D. Jackson