Chinese homebuyers' unwavering belief that real estate was a can't-miss investment propelled the country's real estate sector to become the backbone of its economy.
But over the past two years, as businesses crumble under the weight of massive debt and new home sales plummet, Chinese consumers have demonstrated an equally unwavering belief: real estate has become a losing investment.
This marked loss of faith in property, the main store of wealth for many Chinese families, is a growing problem for Chinese policymakers, who are doing everything they can to revive the ailing industry, to little effect. The problems in the country's real estate sector were laid bare on Monday when a Hong Kong court ordered China Evergrande to close its operations and liquidate the company, which has more than $300 billion in debt.
Like the industry it once ruled, Evergrande limped along for two years after defaulting on payments it owed to investors. Evergrande, lacking cash to pay creditors, tried to convey confidence that its apartments were still a good investment. Surely the market would recover, as it had during previous crises.
But the crisis, already the longest on record, is not only prolonging but accelerating.
In 2023, home sales in China fell 6.5 percent. In December alone, sales fell 17.1 percent from a year earlier, according to Dongxing Securities, a Chinese investment bank. Investment for new projects also slowed. Real estate development fell 9.6 percent last year.
“The market has not bottomed yet,” said Alicia García-Herrero, chief economist for the Asia-Pacific region at Natixis. “There is still a long way to go.”
Last year, even as China's economy was expected to benefit from pent-up consumer demand after the lifting of pandemic restrictions, the property market dented growth. Real estate accounts for about a quarter of China's economy.
The real estate sector began to stagnate after Beijing, concerned about a housing bubble and its impact on the financial system, implemented a series of rules in 2020 aimed at curbing excessive borrowing by property developers. Without easy access to debt, developers struggled to pay off loans and finish building properties that were pre-sold to homebuyers.
Nomura Securities, a Japanese financial services firm, estimates that there are still 20 million pre-sold housing units waiting to be completed, which would require $450 billion in financing to complete.
Now China has lifted many of those restrictions. Financial regulators are urging banks to lend more to real estate developers. Last week, Xiao Yuanqi, deputy director of China's National Administration for Financial Regulation, said the country's financial institutions had “the unavoidable responsibility to provide strong support” to the real estate sector.
Banks should not immediately cut loans to troubled projects, but should find ways to support them by extending the time to repay loans or circulating additional funds, Mr. Xiao added. Last week, China's central bank and financial regulator said it would allow some developers to use bank loans for commercial properties to pay off other loans or bonds.
Since 2021, more than 50 Chinese real estate companies have defaulted on their debt payments, including the two companies that once dominated the country's real estate market: Evergrande and Country Garden. Country Garden, once Evergrande's main rival for industry leadership, defaulted in October. The company's situation has worsened because its sales have plummeted.
Country Garden said pre-sales of unfinished apartments, an important indicator of future income, fell for the ninth consecutive month in December, to 6.91 billion yuan, or $962 million. That was down 69 percent from the previous year. In the second half of 2023, pre-sales decreased by 74 percent from the previous year.
In a research note this month, Larry Hu, chief China economist at Macquarie Group, said the property sector's slump was “self-fulfilling” as developers' debt problems kept buyers away and pressured sales. of housing, while the shortage of new businesses only deepened the financial problems of those companies.
“The key thing to watch in 2024 is whether the central government would step in and take primary responsibility for stopping the contagion,” Hu wrote. He said Chinese authorities could bail out real estate developers, similar to how the U.S. government intervened during the global financial crisis with the Troubled Asset Relief Program, or TARP.
When China took steps to cool down the real estate sector several years ago, one of the measures it took was to limit the purchase of homes by speculators. Homebuyers were required to make large down payments, which discouraged people from purchasing additional properties.
Suzhou, a city in eastern China, lifted most of its restrictions on home purchases, removing limits on the number of homes a person could buy and waiving any residency requirements, state media reported Tuesday.
But even relaxing the rules has not helped lift the market. China's outstanding mortgage loans fell 1.6 percent last year from 2022, a year when businesses and residents in many cities were still struggling with pandemic lockdowns. According to the Chinese business magazine Caixin, this is the first decline in almost two decades. Mortgages had grown more than 10 percent annually through 2021.
A persistent cause for concern for some potential homebuyers remains the large number of pre-sold and unfinished apartments. For years, homebuyers agreed to purchase new apartments and begin paying a mortgage years before the units were built. It caused a stir when some real estate developers suspended construction of pre-sold apartments because they lacked funds to pay contractors and builders.
While the government has pressured companies to finish construction of pre-sold apartments, there are still many projects that are not complete.
Nydia Duan, a 19-year-old college student in Zhuhai, southern Guangdong province, said her family offered to buy her a house when she turned 18, but she resisted because she was partly worried about buying an unfinished apartment.
While house prices have plummeted in recent years, Ms Duan said she was generally pessimistic about the prospects for real estate and preferred to keep her family's money in cash.
“I'm still reluctant to buy one,” she said. “I will consider it when the housing market is more stable.”
