China’s Negative Tone on Property Will Extend Price Plunge, Analysts Say

Laborers work at a development under construction on the busy Nanjing Road shopping street in Shanghai, Oct. 9, 2011. Mark Ralston/AFP/Getty Images

China’s property prices continue to plummet, struggling to find a bottom despite a plethora of measures, primarily due to the country’s negative tone and lack of policy shift towards its beleaguered real estate sector, according to expert research.

Furthermore, China’s explicitly stated priority of ensuring that housing is not for speculation, implies that insolvent developers may be allowed to declare bankruptcy, further weakening the sector’s fundamentals.

“We see no major change in the central government’s policy stance for the property sector [in the Two Sessions meeting concluded on Monday]; the idea of ‘housing is for living in, not for speculation’ has been reiterated again,” said a client note released by Nomura Global Market Research over the weekend, and viewed by The Epoch Times.

The international community closely monitors the annual “Two Sessions” meeting to gauge the country’s planned course of action for the upcoming year. China’s prosperity or setbacks have significant implications for the global economy.

Further, China “has made it clear that non-functional developers that are insolvent should go through [the] bankruptcy or restructuring process, as the government’s priority is to ensure delivery of property projects, not to protect [the] business of property developers,” the note added.

Plummeting Prices

China’s new home prices dropped for an eighth consecutive month in February, according to official data released on Friday, suggesting that the fragile property market is struggling to stabilize despite a series of measures aimed at shoring up the sector.

According to Reuters calculations based on National Bureau of Statistics data, new home prices fell by 0.3 percent month-on-month, mirroring January’s decline.

On a year-on-year basis, prices experienced a sharper decline of 1.4 percent, surpassing January’s 0.7 percent drop and marking the largest decrease in 13 months.

The country’s four first-tier cities—Beijing, Shanghai, Guangzhou, and Shenzhen—saw new home prices decline 0.3 percent in February compared to last month, despite last month’s significant cut to the mortgage benchmark rate.

Prices for second-hand homes in top-tier cities also fell in February by 0.8 percent from the previous month, compared to a 0.6 percent decline in January.

Reportedly, prices in other key provincial cities experienced even larger drops as demand remained subdued amid weakened economic activity.

Since 2021, the property sector has faced successive crises following a regulatory crackdown on developers’ excessive leverage, which led to a liquidity crisis.

The downturn in China’s real estate sector has exerted pressure on the economy beginning with the introduction of the “three red lines” policy in 2021 to curtail overborrowing by developers.

The policy imposed caps on various types of debt, resulting in defaults among some of China’s largest real estate companies.

In January, a Hong Kong court ordered the liquidation of real estate giant Evergrande Group after the developer failed to reach a restructuring deal with creditors over liabilities exceeding $300 billion. Additionally, at the end of February, a liquidation petition was launched against Country Garden, once China’s largest developer, for failing to repay a loan worth nearly $205 million.

Thus far, authorities have refrained from implementing massive stimulus measures to support developers but have instead taken incremental steps to revive the sector, albeit with limited effect.

For example, last month’s reduction in the five-year loan prime rate to 3.95 percent, from 4.2 percent was followed by authorities hinting at more monetary easing to support growth while managing risks.

In January, China introduced a “whitelist” mechanism, directing state banks to increase lending to residential projects. Additionally, several major cities, including Shanghai and Shenzhen, have relaxed purchase restrictions to attract homebuyers.

However, experts believe that this mechanism also fell short of restoring the confidence lost among homebuyers, who remain hesitant to make purchases due to the associated risks.

Meanwhile, China’s housing minister pledged reasonable support for distressed property developers, excluding those facing insolvency.

On Friday, the central bank maintained its interest rate on 387-billion-yuan ($54.5 billion) worth of one-year medium-term lending facility loans to financial institutions at 2.5 percent.

‘Negative Tone’ at Two Sessions

Still, analysts believe that China’s leadership is indifferent about the property sector’s two-and-a-half-year downturn.

“We view the tone on the property sector set at the Two Sessions as negative. It seems to us that the central government is still not too concerned about the property sector’s downward spiral. We thus expect the sector’s fundamentals to remain under pressure amid limited potential policy support,” the Nomura note said.

According to Nomura, while the primary message from the Two Sessions remains the government’s commitment to its long-time policy that housing is not for speculation, the absence of more ambitious stimulus for the sector at the end of the meeting has dampened market sentiments.

That aside, given the ongoing slowdown in primary house sales, property developers’ cash flows will continue to face substantial strain, suggesting that the sector’s fundamentals will remain under pressure despite limited potential government assistance.

A turnaround of the property sector ultimately hinges on whether home sales can stabilize, Nomura said.

“With the limited policy support from the central government—judging from the tone set at the Two Sessions’, we believe achieving stabilized property sales could take a prolonged period of time,” the global research firm concluded.