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China’s ailing property sector is still not out of the woods. After becoming a cornerstone of the economy in recent decades, accounting for around 25-30% of the country’s gross domestic product (GDP), it has been on a downward spiral since the beginning of 2022. However, Beijing has taken supportive measures over the past two years and has recently stepped them up. At the end of April, the Chinese leadership promised to “study policies for reducing existing housing stock”, and a new round of measures to support the troubled property sector followed in May.
Among other things, the People’s Bank of China (PBOC) pledged to provide 300 bn yuan ($42.25 bn) to financial institutions so that they can lend to local state-owned enterprises (SOE) to buy unsold flats that have already been built. In addition, the lower limit for mortgage interest rates was lifted, and the minimum down payment for first- and second-home buyers was lowered.
“This is an important change in Xi Jinping’s approach and may signal that changes in other macro policies are also coming,” Andy Rothman, Investment Strategist at Matthews Asia, commented.
„The new measures will not, on their own, solve the deep problems in China’s residential property market, but I believe they are important first steps, primarily because they reflect a decision by Xi to finally acknowledge the problems—caused largely by his earlier policies—and to publicly take responsibility for fixing them,” Rothman added.
Other market observers also acknowledge the “course correction”.
“The impact of these new policies on the property market will depend on execution and whether it can lift sentiment among potential homebuyers,” said Alec So, Analyst at Anglo-South African asset manager Ninety One. “But the outlook for the larger, more traditional private developers remains complicated due to the significant debt levels and the large-scale over-development in lower-tier cities,” he commented.
Solving China’s real estate troubles will take years
Before the property crisis, homes in China were generally sold before construction work was completed. This has changed, as have the delays in construction, as property developers have run into financial difficulties. An estimate by Nomura revealed that in 2023, there were around 20 million pre-sold but unfinished apartments in the country.
A report by Caixin found that it will take more than two years to clear the existing stock of new homes at the current sales pace. Historically, it was 12 to 14 months.
Furthermore, Oxford Economics estimates that it will take real estate developers at least four to six years to complete unfinished residential properties.
Meanwhile, home prices and values in April recorded their steepest month-to-month declines in a decade. According to figures from China’s National Bureau of Statistics, new-home prices in 70 cities fell 0.58% from March, and the values of existing homes dropped 0.94%. Compared to a year earlier, new-home prices fell 3.51% in April and existing-home prices dropped 6.79%.
According to Fidelity International, deflation pressure is most severe in property. “And in a country where property accounts for a big portion of household assets, its impact on consumer confidence is pronounced,” said Peiqian Liu, Asia Economist at Fidelity International.
“China’s economy is in a long-term transition from a growth model that relied on property and investment to a consumption-led growth – but we expect further loosening measures to come. It will take time to see whether they can fix the long-running property downturn,” Liu opined.
