Chinese real estate crisis 'has not yet reached the bottom'

Chinese homebuyers' unwavering belief that real estate was an investment that couldn't be lost made the country's real estate sector the backbone of the economy.

But over the past two years, as companies collapsed under the weight of massive debt and new home sales plummeted, Chinese consumers have demonstrated an equally unwavering belief: real estate has become a losing investment.

This sharp loss of confidence in real estate, the main source of wealth for many Chinese families, is a growing problem for Chinese policymakers who are pulling out all the stops to revive the ailing industry – with very little results. The problems of the country's real estate sector were laid bare on Monday when a court in Hong Kong ordered China Evergrande to cease operations and liquidate the company, which is saddled with more than $300 billion in debt.

Like the industry it once ruled, Evergrande limped along for two years after defaulting on payments it owed to investors. Evergrande, lacking the cash to pay creditors, tried to project confidence that its apartments remained a sound investment. The market would certainly recover, as it has during previous recessions.

But the recession, which is already the longest on record, is not only dragging on, but accelerating.

In 2023, Chinese home sales fell by 6.5 percent. In December alone, sales fell 17.1 percent from a year earlier, according to Dongxing Securities, a Chinese investment bank. Investments in new projects also slowed down. Real estate development fell by 9.6 percent last year.

“The market has not yet bottomed out,” said Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis. “There is still a long way to go.”

Last year, even as China's economy was expected to benefit from pent-up consumer demand after the lifting of pandemic restrictions, the real estate market weighed on growth. Real estate accounts for about a quarter of the Chinese economy.

The real estate sector began to stagnate after Beijing, concerned about a housing bubble and its impact on the financial system, rolled out a series of rules in 2020 to curb excessive borrowing by real estate developers. Without easy access to debt, developers struggled to pay off loans and offload properties that had been pre-sold to homebuyers.

Nomura Securities, a Japanese financial services company, estimates that there are still 20 million pre-sold homes waiting to be completed, which would require $450 billion in financing.

Now China has withdrawn many of those restrictions. Financial regulators are urging banks to lend more to project developers. Last week, Xiao Yuanqi, deputy director of China's National Financial Regulatory Administration, said: said The country's financial institutions had “an inescapable responsibility to provide strong support” to the real estate sector.

Banks should not immediately stop lending to troubled projects, but should find ways to support them by extending the time to repay the loans or releasing additional funds, Mr Xiao added. Last week, China's central bank and financial regulator said some developers could use bank loans for commercial real estate to repay other loans or bonds.

Since 2021, more than 50 Chinese real estate companies have defaulted on their debts, including the two companies that once dominated the country's housing market: Evergrande and Country Garden. Country Garden, once Evergrande's main rival for industry leadership, effectively went bankrupt in October. The company's situation has worsened as sales have collapsed.

Country Garden said presales of unfinished apartments, a key indicator of future revenues, fell for the ninth straight month in December to 6.91 billion yuan, or $962 million. That was 69 percent less than a year earlier. In the second half of 2023, presales were 74 percent lower than a year earlier.

In a research note this month, Macquarie Group's chief Chinese economist Larry Hu said the property crisis was “self-fulfilling” as developers' debt levels kept buyers away and put pressure on home sales, while the lack of new business only the financial problems of these companies worsened.

“The most important thing to watch in 2024 is if and when the central government will step in and take the main responsibility for stopping the contagion,” Mr. Hu wrote. He said Chinese authorities could bail out property developers, similar to how the US government intervened during the global financial crisis with the Troubled Asset Relief Program (TARP).

When China turned to real estate cooling several years ago, one of the steps it took was to restrict speculators from buying homes. Homebuyers had to make large down payments, discouraging people from purchasing additional properties.

Suzhou, a city in eastern China, has lifted most restrictions on home purchases, lifting limits on the number of homes one person can buy and eliminating residency requirements, state media reported Tuesday.

But even relaxing the rules has not helped the market get going again. China's outstanding mortgage loans fell 1.6 percent last year from 2022, a year when businesses and residents in many cities still faced pandemic lockdowns. This, according to Chinese business magazine Caixin saw the first decline in almost two decades. Until 2021, mortgages grew by more than 10 percent annually.

A continuing cause for concern for some potential homebuyers remains the large number of unfinished, pre-sold apartments. For years, homebuyers agreed to purchase new apartments and pay off a mortgage years before the units were built. It caused an uproar when some developers halted construction of pre-sold apartments because they did not have enough money to pay contractors and builders.

Although the government has pushed companies to complete the construction of pre-sold apartments, there are still many projects that have not been completed.

Nydia Duan, a 19-year-old student from Zhuhai, southern Guangdong province, said her family offered to buy her a house when she turned 18, but she resisted, partly because she was concerned about purchasing a home. unfinished apartment.

Although house prices have fallen sharply in recent years, Ms Duan said she was generally pessimistic about the prospects for real estate, preferring to keep her family's money in cash.

“I'm still hesitant to buy one,” she said. “I will think about it when the real estate market is more stable.”