China’s Plunging Housing Market Is Only Halfway to Bottom, Analysts Say

An aerial view of the Evergrande Changqing community, in Wuhan, China, on Sept. 26, 2021. On Jan. 29, a Hong Kong court ordered the indebted property developer to liquidate. Getty Images

Housing starts in China are likely to stay depressed and home prices will drop significantly over the next two years, particularly in larger cities, investment bank Goldman Sachs and Paris-based asset manager Amundi Investment Institute (Amundi) have said in recent reports.

“We estimate that real house prices in China declined 16 percent from the peak in the third quarter of 2021 to the third quarter of 2023,“ Goldman Sachs said in a Feb. 18 client note, which was viewed by The Epoch Times. ”If the U.S. experience is of any guidance, we are only halfway through the downward price adjustment in the current housing downturn.”

New housing construction and new home sales have been hit harder than existing house prices, and both are expected to remain sharply depressed for the next several years because of the substantial inventory overhang, the bank added.

China’s property sector, which accounts for a quarter of its economic activity, and where around 70 percent of household wealth is parked, is weighing heavily on household consumption and saving. The effect is rippling across the economy and clouding its recovery.

Every 5 percent decline in home prices wipes out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics. As property owners feel poorer following a sharp fall in home prices, they tend to cut spending to rebuild their fortunes.

In mid-2021, China Evergrande Group, China’s largest property developer at the time, began to default on its creditors, bringing the country’s property crisis into sharp focus. Other developers, including Sunac, Greenland, and Country Garden—which defaulted on $11 billion worth of offshore bonds late last year—are facing similar crises.

According to Bloomberg data, 34 of China’s top 50 developers have defaulted on their debt obligations at some point over the past 2 1/2 years.

However, the most pressing issue for a sustainable property market is the completion of pre-sold houses, which are typically paid for in full upfront rather than with a deposit or down payment.

Experts say property prices are sliding below sustainable levels, because buyers fear that their purchased houses may never be delivered.

“Real estate ... remains a sector where there is little optimism for the moment; ongoing sales decline YoY [year on year], a lack of progress on restructuring initiatives in external bond markets combined with combined with a lack of game-changing stimulus in the underlying markets themselves has left the sector without major positive catalysts,” Amundi said in a Jan. 22 report.

Given China’s restrained easing and deteriorating supply and demand dynamics, house sales are likely to drop 10 to 15 percent per year in 2024–25, before momentum stabilizes and the market enters a “a gradual decline mode,” the asset manager added.

Structural Reasons for Property Sector Woes

According to Goldman, structural reasons, specifically China’s “unique land supply mechanism,” are the prime contributors to China’s property sector woes.

In China, almost every piece of real estate is owned by local governments, which have a stranglehold on the land supply since land sales are an important revenue source for these governments. The share of land sale revenue in local government revenue was 30 percent, or 8.7 trillion yuan (about $1.2 trillion) in 2021, according to a July 2023 report from the Washington-based Peterson Institute for International Economics.

As a kind of shadow financing, Local Government Financing Vehicles (LGFV) provide a conduit for local governments to borrow money from banks, typically using property as collateral.

Local governments in China also sell industrial land at a fraction of the price of residential land, therefore indirectly subsidizing industrial land supplies. Residential land sales are the main source of total land sales revenue.

“Beijing’s objective is to engineer a controlled decline for the real estate sector, not to revive the sector,” Amundi noted, adding that any easing of housing regulation has been strategically limited to support only rigid demand and executed in a city-specific approach.

IMF Warning

A Feb. 2 report from the International Monetary Fund (IMF) called the drop in housing starts historic, a pace “only seen in the largest housing busts in cross-country experience in the last three decades.”

The IMF report noted that “China’s housing market faces additional pressures in coming years from structural factors, in particular demographic change.”

The need for additional new housing will continue to diminish in coming years as China’s population declines and urbanization slows, it added.

“Large public subsidies in the previous decade helped millions of people move to newer housing from older buildings lacking modern amenities. Such demand will likely be more limited as depressed land sale revenues have tightened local government fiscal constraints and fewer residents live in older housing,” the IMF report said.

China’s birth rate has been declining for years, and last year, for the first time in 60 years, the country’s death rate topped its birth rate. Its population dropped by 2.08 million in 2023, according to January figures from China’s National Bureau of Statistics.

As China’s population drops, the effect on households and, consequently, the demand for housing, will be significant, according to the Amundi report. Urban households are projected to reach 7 million units in 2026, before falling dramatically to 4 million to 5 million in 2030, the report predicts.

Learning From US Housing Crisis

Given that homebuyers and sellers are typically individuals rather than financial experts, sales prices are often projections of recent transactions, and physical property inventory excess persists for years, housing busts, once started, often continue for years, warned Goldman, citing the 2008 U.S. housing market crash.

U.S. real home prices peaked in 2006 and bottomed out in 2012. Homeowner vacancy rates peaked in 2008; it was a decade before they would fall again to their long-term average.

Although the Chinese housing market won’t follow the exact path of the U.S. housing market, there are lessons China can draw from the U.S. subprime crisis, the global investment bank noted.

First, deleveraging is a difficult process for the economy. In the United States and elsewhere, deleveraging mostly happened in the household sector. In China, however, highly indebted developers and local governments are feeling the pain of paying off their debt.

Second, banks act very cautiously after a housing bust. In the United States, the early 2000s saw rapid growth in private-label mortgages, leading up to the height of the subprime credit boom in 2004–2006. When the financial crisis hit, private-label mortgages virtually disappeared.

In China, even though financial regulators have encouraged banks to lend more to real estate developers who are cash-strapped, banks are still reluctant to lend because they don’t want to lose money on loans that aren’t paid back. The government now needs to step in with guarantees to increase bank lending, according to Goldman.

Finally, policymakers must reduce negative spillovers triggered by the housing collapse. During the U.S. subprime crisis, negative spillovers included scores of involuntary foreclosures. They also included damage to the financial system through products such as collateralized debt obligations (CDO). CDOs created a false sense of risk diversification and spread financial contagion as mortgage defaults increased.

The housing crash caused the CDO market—which was backed by subprime mortgages—to implode as well, losing hundreds of billions of dollars for financial services institutions.

In China, the negative spillovers include pre-sold homes left unfinished by liquidity-strapped developers, forcing buyers to choose older homes over new ones and exacerbating developer cash flow problems. Spillovers also include declining land sales, and local governments responding to stress by slashing spending and failing to pay employees, further weakening the economy and the housing market.

China needs to take forceful action to support local governments and banks, recognize nonperforming loans, and ensure the timely delivery of pre-sold homes, the Goldman note concludes.

“Absent such decisive actions, negative spillovers are likely to prolong the economic damage of the housing downturn.”