NANNING, CHINA - MAY 17, 2023 - A commercial residential property is seen in Nanning, South China's Guangxi Zhuang autonomous region, May 17, 2023.
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Weakness in China's real estate sector could be a drag on the economy for years to come and could even impact countries in the wider region, Wall Street banks have warned.
"We see persistent weaknesses in the property sector, mainly related to lower-tier cities and private developer financing, and believe there appears no quick fix for them," Goldman Sachs economists led by China economist Lisheng Wang said in a weekend note.
Goldman's economists said the property market is expected to see an "L-shaped recovery" — defined as steep declines followed by a slow recovery rate.
"We only assume an 'L-shaped' recovery in the property sector in coming years," they said.
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"Based on our estimates, the property weakness will likely be a multi-year growth drag for China, but it could be less painful in 2023 than in 2022."
Data from May showed China's property sector is still struggling to turn around, despite signs of recovery earlier this year.
Market watchers predict China will likely support the real estate sector through fiscal stimulus policies, expected to be released as the economy struggles to regain momentum after reopening from Covid-19.
Hong Kong-listed Chinese property stocks jumped Tuesday after the People's Bank of China cut its seven-day reverse repurchase rate by 10 basis points from 2% to 1.9% — it was the first such cut since August.
On Tuesday, property developerLogan Groupjumped as much as 4.5% andCountry Gardenrose 4% on hopes of further stimulus and policy easing ahead.
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Goldman Sachs economists also noted there are expectations for China's government to introduce more housing stimulus packages to support the sector.
"We believe the policy priority is to manage the multi-year slowdown rather than to engineer an upcycle," the analysts said, adding that Goldman does not expect "a repeat of the 2015-18 cash-backed shantytown renovation program."
They were referring to China's urban redevelopment project which aimed to renovate millions of dilapidated homes over a period of time to drive up urbanization and improve livelihood.
According to Reuters, the government invested some $144 billion for the first seven months of 2018 to compensate residents of homes that were demolished in a bid to boost home sales and prices in smaller cities struggling with unsold homes.
Divergence between public and private
Another concern for the property sector is a wide divergence between government-owned property businesses and private companies in the industry, JPMorgan's Asia Chief Market Strategist Tai Hui said.
If the challenges in the property sector deepen and bring risk aversion in the financial system and affect consumer confidence, this will cause a deeper slowdown in China.
"I think that recovery is going to be slow, but I think there also a huge divergence between the state-owned developers which have done better in this current rebound versus the more private sector developers, who are still struggling," Hui told CNBC's "Squawk Box Asia" on Tuesday.
The property sector was also highlighted in a government work report released earlier this year, which called for support for people buying their first homes and to "help resolve the housing problems of new urban residents and young people."
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Hui said the government's push to cap property prices at a certain level could be missing a big chunk of potential buyers.
"While the authorities have been relaxing some of their policies in the past 6 to 9 months, I think the intention to maintain price affordability, i.e., not let prices go up too much ... that's really taking a big part of the potential buyer base out of the equation," he said.
Further slowdown ahead
Morgan Stanley, in its mid-year outlook report, warned that further weakness in the property sector will likely bring more headwinds for China's growth.
"If the challenges in the property sector deepen and bring risk aversion in the financial system and affect consumer confidence, this will cause a deeper slowdown in China," Morgan Stanley's chief economist Chetan Ahya wrote.
Should monetary easing measures fail to support the ailing property sector, it will also lead to concerns of a spillover effect in the rest of the Asia-Pacific region, the firm's economists said.
A "downside risk would be if China's property sector does not stabilize even with the easing we expect," they said. "In that scenario, confidence and financial conditions will tighten in China, which will have direct implications for China's growth but also will negatively spill over to the region."
– CNBC's Evelyn Cheng contributed to this report.
FAQs
“Based on our estimates, the property weakness will likely be a multi-year growth drag for China, but it could be less painful in 2023 than in 2022.” Data from May showed China's property sector is still struggling to turn around, despite signs of recovery earlier this year.
Is China's real estate slump about to get worse? ›
Capital Economics says an "unavoidable structural decline" in China's property sector has just begun. Property sales and starts have collapsed, and construction could fall by half in the years ahead.
What happens if China real estate crashes? ›
In short, the materialization the property crash scenario in China would tilt the balance of risks for U.S. growth and inflation to the downside. As we've discussed, however, the Chinese authorities appear to have adequate tools to contain new downward pressures on the country's economy.
Is property slump vexing China projected to last for years? ›
China could feel the impact of its property crisis for the next 10 years, economist says. The correction in China's property sector could end up lasting over 10 years, one economist says. That's due to a boatload of inventory still under construction, GROW Investment's Hao Hong said.
Why real estate is falling in China? ›
Sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future. At the same time, key property sector vulnerabilities have yet to be addressed, pointing to ongoing risks to sustainability.
Is China in a slump of real estate? ›
China's real-estate market set an unwelcome record last month. The price of secondhand homes in the country's most developed cities fell 6.3% in February compared to the same month last year. That was the worst year-on-year decline since the government started releasing data in 2011.
Is China facing a real estate crisis? ›
The Chinese property sector crisis is a current financial crisis sparked by the 2021 default of Evergrande Group. Evergrande, and other Chinese property developers, experienced financial stress in the wake of overbuilding and subsequent new Chinese regulations on these companies' debt limits.
Is China buying up American real estate? ›
During the coronavirus pandemic, buyers from Canadian and Mexican origin dominated international transactions, but in 2022 Chinese nationals bought the most U.S. residential property. They were also responsible for the largest share of the aggregate value of properties purchased.
How will China real estate crisis affect globally? ›
China's Property Crisis Is Starting to Ripple Across the World. Chinese investors and their creditors are putting up “For Sale” signs on real estate holdings across the globe as the need to raise cash amid a deepening property crisis at home trumps the risks of offloading into a falling market.
What is going on with China's real estate? ›
Things to Know About China's Property Slump
In China's residential market specifically, new home sales dropped 6% in 2023, with secondhand home prices declining in major cities. And on the development side, new residential developments have fallen 58% from 1,515 million m² in 2019 to 637 million m² in 2023.
Total Chinese property sales were down almost 20% in 2024, across both massive national and smaller regional developers. (State-owned companies control almost 90% of the national market.) The property sector's downturn led the IMF to downgrade its growth estimates for the Chinese economy.
Will the US housing market crash in 2024? ›
No — experts do not think there is a housing market crash looming in 2024. Lending standards are much more strict now than they were before the Great Recession, and with low inventory and high demand both continuing, the housing market is not likely to enter a recession in the coming year.
Are China property prices falling? ›
Property prices continued to decline in early 2024
The National Bureau of Statistics published the February data for a 70-city sample of housing prices in China, which showed a continued price decline in line with expectations.
What is the biggest real estate company in China collapse? ›
Evergrande — once China's largest real-estate developer — has collapsed. The pivotal moment came on January 29, when a Hong Kong court ordered the liquidation of the most indebted property developer in the world.
Which real estate company fails in China? ›
A Hong Kong court has ordered the liquidation of the Evergrande Group, China's giant and massively indebted real estate developer, after the company was unable to restructure the $300 billion it owed investors. Just six years ago, Evergrande was riding high, preselling apartments to middle- and upper-income Chinese.
Why do Chinese buy so much property? ›
Some Chinese business people have the view their commercial property is a second business to them. This ensures the security that even if their first business is not profitable; the second business in commercial real estate will give them long-term prosperity, which also means capital gains.
Are house prices dropping in China? ›
House Prices Falls Deepen in China
Declines in prices of new homes are “showing no signs of ebbing,” said Kelvin Lam, a senior economist at Pantheon Macroeconomics. “The second-hand market continues to take a hammering.” China's three-year housing slump is dragging on growth in the world's second-largest economy.
What is happening to real estate in China? ›
Total Chinese property sales were down almost 20% in 2024, across both massive national and smaller regional developers. (State-owned companies control almost 90% of the national market.) The property sector's downturn led the IMF to downgrade its growth estimates for the Chinese economy.
