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The real estate sector has to shrink in order to be stable, says Prof

China’s real estate sector needs to become “much smaller” in order to keep the overall economy healthy and stable, said a top expert on the Chinese housing market.

“We have too great a risk in the industry. We have built too many apartments, so stabilization has to come first” [from] trim the sector, “Li Gan, an economics professor at Texas A&M University, told CNBC’s Street Signs Asia on Wednesday.

Gan estimated that about 20% of China’s housing stock is vacant as buyers purchase second and third properties as investments. Even then, developers build millions of new units every year, he said.

Chinese property developers have grown rapidly after years of excessive borrowing. Problems in this sector have come to the fore in recent months as Evergrande and other developers missed repaying bonds and threatening to default.

Using the real estate sector to boost GDP growth is not a sustainable path for China.

Li Gan

Professor of Economics, Texas A&M University

The authorities in China have stepped up efforts to contain excesses in the real estate sector and curb speculation among home buyers. middle These include limiting rampant borrowing among developers and tightening the rules on mortgage lending.

There are signs that housing demand in China has cooled, said Gan, who is also director of the Survey and Research Center for China Household Finance at Southwestern University of Finance and Economics in the Chinese city of Chengdu.

“Some of the real estate companies, I would say, need to get out of the sector in order for the country and the sector to be healthy. So Evergrande’s problem is just the beginning, a lot of companies would have to get out of the sector because the demand is gone, “said Gan.

Evergrande has $ 300 billion in debt. Concerns about the company’s ability to repay its debts startle global investors worried about possible spillover to the rest of China’s real estate economy and economy.

Li Daokui, a former advisor to the People’s Bank of China, told CNBC last month that Evergrande is likely to be “broken up” into four main groups.

Prices for new homes have stalled

China’s new home prices have stalled for the first time since February 2020 according to Reuters calculations based on the latest official data.

The average new building prices in 70 Chinese cities remained unchanged in September compared to the previous month, said Reuters. In August, the new building prices were 0.2% higher than in the previous month, said the news agency.

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Gan said lower home prices would allow consumers to spend on other things, which would be healthier for the wider economy. He added that consumption is an important driver to absorb the downturn in the Chinese economy.

Overall, the contribution of real estate and related industries to China’s gross domestic product could drop from around 30% at present to around 15%, Gan predicted.

He added that the Chinese government will be able to bring about a gradual slowdown in the real estate sector to avoid a hard landing in the economy.

“Using the real estate sector to increase GDP growth is not a … sustainable path for China,” said the professor.

A slowing real estate sector has adversely affected China’s economic growth. The world’s second largest economy reported disappointing GDP growth of 4.9% yoy on Monday.

– CNBC’s Evelyn Cheng and Weizhen Tan contributed to this report.

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