China’s Property Sector Faces Challenges, Even as State Policies Generate Demand: Experts

A view of a complex of unfinished apartment buildings in Xinzheng city in Zhengzhou, China's central Henan Province, on June 20, 2023. (Pedro Pardo/AFP via Getty Images)

China’s recent property sector policy easing will likely generate demand, but the effect could wane within a few months as economic recovery struggles and homebuyers turn cautious, said Moody’s on Thursday, cutting the second-largest economy’s property sector outlook to negative from stable.

“While the government has recently strengthened policy support for the sector, weaker economic growth prospects and concerns over on-time project completion and delivery will continue to weigh on homebuyers’ confidence and demand for the next 6–12 months,” according to the Moody’s report.

Consequently, China’s property sector will continue to struggle, given that homebuyers’ lingering concerns have started reflecting renewed weakness in the residential property market.

In recent weeks, Beijing introduced a raft of measures—such as lowering mortgage rates and down payment ratios, as well as altering the criteria of first-time home purchasers—to allow home buyers to benefit from cheaper borrowing costs and down payments.

Since the beginning of this month, a few larger cities—including Shenzhen, Guangzhou, Wuhan, Nanjing, and Dalian—have also lifted home-buying restrictions imposed in recent years to deflate a housing bubble.

But a spate of financial defaults by cash-strapped builders is weighing on property sales, at the crux of which is China Evergrande Group, the most indebted property developer in the world. The credit stress at Country Garden has further amplified homebuyer risk aversion, said Moody’s.

According to the global credit rating agency, while the earlier expectation was that supportive policies would gradually bolster sentiment, progress has been held back by the muted sales of financially weak developers and financial institutions’ caution about privately owned developers.

“Nationwide sales declined by around 20 percent in June and July 2023, respectively, reflecting a deterioration from the 11.9 percent growth for the first five months of 2023,” Moody’s noted.

Lower-tier cities, particularly in regions with weaker economies, are suffering more, the rating agency added, amid continuing population outflow.

Larger Concerns

Yet, while Moody’s is worried about China’s economic challenges, there are larger forces at play behind China’s property sector woes, according to Robert Swift, chief investment officer at Sydney-based Delft Partners.

“Oversupply of property offerings, the share price weakness and bond price declines of the major developers, and the perceived drop in the potential economic growth rate of China caused by anti-businesses regulations, excessive COVID shutdowns, are also weighing on property investors’ [and foreign investors’] minds,” Mr. Swift told The Epoch Times.

According to Moody’s data, the reopening momentum witnessed in March, April, and May remains muted, suggesting that the economic rebound from a protracted zero-COVID policy has also remained weak.

“Sentiments have been further weakened by the strategic decision of the West to woo India and impose tech embargoes on China,” said Mr. Swift.

Besides, confidence is being knocked because “China continues to act ‘anti-socially’ with its IP thefts, covert surveillance, and human rights violations,” he added.

Given that “low consumer confidence has held back household spending, including property purchases,” Moody’s predicts that contracted property sales in China will be short-lived, with a “fall of about 5% over the next six to twelve months.”

The declining growth in mortgage loans in the past 12 months, despite the reduction of benchmark borrowing costs, reflects the trend, according to Moody’s.

However, it is not “gloom and doom” all over the sector. Moody’s expects demand in larger cities to be more resilient since the new policy measures will benefit big-city homebuyers who were subject to much higher restrictions and higher down payment ratios.

Homebuyers in these cities are also more likely to have demand for upgrading their homes.

‘A Little Bit of Support’ Needed

Moody’s said the property sector needs a sustained recovery in nationwide contracted sales, along with a stronger economic prospect and a restoration of homebuyer confidence for the sector’s rebound.

Over time, within 12 to 18 months, the city-based policy easing in larger cities could also help ramp up sales in big cities, where demand often outweighs supply, according to a note by Fitch Ratings, accessed by The Epoch Times.

A Fitch trend study on Chinese cities found that the top 20 cities with gross regional product (GRP) of over 1 trillion yuan outperformed the bottom 31 cities in fundamental factors like GRP size and growth, urban population, urbanization rates, and housing affordability measured by per capita GDP to home price.

These basic elements determine mid-to-long-term housing demand and may affect short-to-mid-term demand, noted Fitch.

Still, “the last thing China needs is a housing-led fixed asset investment boom, so, the way out of this mess is a little bit of support but not enough to repeat ‘boom, bust, and bail,’” said Mr. Swift.

This requires a change in policy by Chinese leader Xi Jinping or someone else to grow the economy, he added.