(Bloomberg) — The stimulus wave to revive China’s housing market — billions in bank loans, rate cuts and support for developers — has done little to help Echo sell her home near Shanghai.
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The media worker has received just four nibbles from potential buyers in six months and is considering a 10 percent cut from its 3.3 million yuan ($460,000) asking price. She believes this stagnant housing market, the worst in China’s recent history, will drag on for years.
“Everyone is waiting for a bigger drop in home prices before making a decision to buy,” said Echo, who asked to be used by her first name only, fearing retribution for her negative outlook. “There will be a vicious circle.”
While many economists are saying China’s crippling housing downturn isn’t going to get much worse and that stimulus will kick in this year or next, the reality on the ground looks much grimmer for sellers like Echo.
Home sales and prices remain sluggish amid an economic slowdown and Covid Zero restrictions. Consumer confidence is near a record low and a recent central bank survey found that 73% of households expect house prices to remain flat or fall in the near future. Not even the Golden Week holiday, usually a good time for real estate, failed to provide a spark with sales falling 38%.
As President Xi Jinping and other Communist Party leaders gather for their biannual congress on Sunday, few issues matter more than a housing market, which is being hampered by Beijing’s own policies aimed at reducing credit risk while making housing more affordable to make, in the name of “shared prosperity.”
With estimates ranging from $2.4 trillion for the new construction market to $52 trillion for existing stock, the sheer expansion of China’s housing sector means the stakes are high.
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Real estate accounts for about a quarter of domestic output and nearly 40% of household wealth. Popping a bubble of this size without triggering a financial crisis is difficult for any government, and previous attempts in Japan from 1989 and the US in 2007-08 proved disastrous.
Policy makers are showing an increased urgency to deal with the consequences. Recent measures include the central government allowing nearly two dozen cities to cut mortgage rates. Financial regulators have ordered the largest state-owned banks to allocate at least 600 billion yuan in funding to the industry. Beijing even offered a rare tax break for people buying a new home within a year of the sale.
So far, none of the moves have done much to restore confidence in a sector that has endured endless pain over the past 18 months. The government crackdown on borrowing has hit developers like China Evergrande Group, sparking a wave of bond defaults worth more than $50 billion.
An analysis by the International Monetary Fund this week showed that 45% of developers may not be able to meet their debt obligations with income, and 20% of them could default if their inventory value is valued at current property prices.
A high-yield bond indicator remains near its lowest in more than a decade, while the main housing stock index is down 39% this year. Real estate stocks and bonds are unlikely to rise until house sales pick up.
Consumers are also feeling the effects of the crisis. The turmoil has sparked unprecedented protests after developers’ tight budgets caused construction delays across China and prompted hundreds of thousands of homeowners to boycott their mortgage payments until their homes are built.
The potential spillover effects on the economy are massive. Millions of households are seeing their nest egg quickly depreciate in value while the Covid lockdowns have eroded consumer confidence. That means a record rise in savings and the weakest demand for credit since before the global financial crisis. In the year to September, banks have issued the fewest mortgages of any year since 2015.
The current second-year downturn is already breaking records, making it the steepest and longest slump since home ownership began in the 1990s. While sales in major cities like Beijing, Shanghai and Shenzhen edged up slightly in the first few weeks of September, the overall dollar market across the top 100 developers was still down 25% year over year last month.
Lengmu, a real estate agent in Shanghai, has closed just two deals since the city lifted its lockdown in June. He says the average number of used homes sold in a block has fallen to under 10 in the last six months, compared to around 30 to 50 in a good year. Customers have either left town or are waiting for prices to stop falling.
“It’s really difficult to broker a deal these days,” said Lengmu, who only wanted to use his first name and has been in the real estate industry for four years. He hopes the market will improve after the rate cuts. “If you can’t strike a deal, you won’t get paid more than your base salary. I feel pressured.”
market floor
Some economists say the policy moves, along with a gradual easing of Covid restrictions, could help the market bottom this year and plateau by 2023. Few call for a strong recovery.
“The government’s actions are aimed at preventing housing market difficulties from spilling over into the broader economy, rather than stimulating the housing market,” Morgan Stanley analysts including Stephen Cheung and Chloe Liu wrote in an Oct. 9 note . They don’t see any recovery before the second quarter of next year. Deutsche Bank AG says the market may have bottomed in August.
Optimists point to China’s burgeoning middle class, which will fuel new levels of spending. China overtook Japan as the world’s second largest economy in 2010, aided by the greatest urbanization in history.
Still, Bloomberg Economics says that trend is slowing as about 65% of China’s population now lives in cities. According to Chang Shu, chief Asia economist at Bloomberg Economics, housing supply will need to fall by about 25% to match projected underlying demand in 2031. Fundamental demand shuts out speculative buyers.
Supply is already plentiful after developers like Evergrande have embarked on a loan frenzy over the past decade to build more homes. Bloomberg Economics estimates that around 2.8 billion square feet of real estate is currently vacant — an area 47 times the size of Manhattan.
Even as Beijing takes steps to bolster the market, the government is sticking to its mantra that “houses are for living, not speculation” – suggesting there is no interest in moving into the go-go era of the last decade to return. The completion of unfinished houses is more about containing social unrest and ensuring financial stability.
“Central authorities will likely need to make some sort of public and credible commitment to ensure housing construction is carried through to completion,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research Ltd. in London. “A few words from Xi Jinping that this is a political priority might suffice.”
This equanimity fuels bets that Xi will do more during his third term to ensure China weathers the crisis. None of the economists polled by Bloomberg are calling for a recession anytime soon: the median estimate is for gross domestic product to grow 5.1% in 2023, up from 3.4% this year.
“China as a country will weather the real estate downturn — it always does,” said Anne Stevenson-Yang, co-founder of research firm J. Capital Research Ltd., which is bearish on Chinese real estate. “But people will take losses and banks will be asked to give a haircut.”
Morgan Stanley economists recently attempted to predict what will happen if Beijing slows, modeling a stress test that would result in just 1% growth and 11 million job losses in the first half of next year. The IMF painted its own bleak picture of how the housing crisis could turn into a banking crisis. In one scenario, 15% of small banks could go under.
“All you can do is look at history and make an educated guess,” said Larry Hu, an economist at Macquarie Group Ltd., who last year predicted Beijing’s tightening policies would last into 2022. “What if the authorities can tolerate another 12 months downcycle? This is your new nightmare scenario.”
(Updates with IMF report in paragraph 11)
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