By Samantha Barnes, International Banker
According to data published by the National Bureau of Statistics of China (NBS), the prices of China’s new homes fell by an annual rate of 0.2 percent in November on average, marking the fifth straight month during which prices declined. Excluding the sole and modest 0.1-percent rise recorded in May, this negative trend stretches back to May 2022, reflecting the severity of the downturn that plagued Chinese real estate last year. Add the impacts of an oversupplied market, a heavily indebted sector and a tepid sales outlook, and many expect the country’s property woes to continue in 2024.
Much of the sector’s ongoing lull has swirled around the failings of a handful of key property developers that, in most cases, became excessively leveraged, having borrowed substantial amounts at cheap rates to fund dozens of new real-estate projects and expand quickly. But with authorities cracking down on the alarming levels of indebtedness that emerged throughout the sector in 2020, alongside a tougher construction environment during the COVID-19 pandemic that year, a crisis unfolded that most notably saw the behemoth China Evergrande Group default on its offshore debt obligations in early 2021 and China’s biggest developer by total sales, Country Garden, default on its US-dollar debt in late October. The two developers have reportedly amassed debts of around $300 billion and more than $200 billion, respectively.
Financial mismanagement, construction delays and subdued property sales have continued to compound cash-flow challenges for real-estate developers further, raising the likelihood of more defaults materialising in 2024. Indeed, with the Chinese housing market characterised by homes being purchased well ahead of their completion, developers need to demonstrate that they can manage projects through to the end if they hope to continue securing business in the future.
The indebtedness now pervading the sector, however, has meant that construction delays have plagued developers; in turn, potential homebuyers’ interest in purchasing properties and obtaining mortgages has sharply cooled due to the likelihood of waiting much longer before moving into their new homes. Indeed, the Nomura Group reported in November that, as of the end of 2022, there were around 20 million units of unconstructed and delayed pre-sold homes.
Such challenges have profoundly impacted the world’s nominally second-largest economy, with the real-estate sector currently accounting for around 13 percent of gross domestic product (GDP), roughly half of what it was at its peak during the previous decade. Nonetheless, 2023 began brightly, with official figures showing new residential builds growing by 3.5 percent during the first couple of months, thus registering the first positive cumulative growth posted in 14 months. But by the second quarter, it was clear that China’s post-pandemic resurgence in housing demand was running out of steam, with sales again on a downward trajectory. And by the third quarter, the value of the real-estate sector’s output was shrinking by 2.7 percent quarter-on-quarter, according to the official statistics bureau.
The slump in newly commenced real-estate projects in 2023 put China on track for a record three consecutive years of negative growth in property construction. As reported by Bloomberg in late December, the country’s main measure of real-estate investment fell by 8 percent year-on-year for the 11 months of 2023 through November, comparable with the 8.4-percent decline experienced for all of 2022. This declining construction activity continues to inform much of the weakness in domestic demand, thus triggering a substantial shrinkage of the overall real-estate market. Declining sales activity has also done much to damage local governments’ finances through lower fiscal receipts.
Thankfully, Beijing has stepped up with a series of measures designed to reignite the troubled sector. In late August, regulators slashed requirements for down payments for first- and second-time homebuyers while lowering mortgage rates to “save interest expenses for borrowers, which helps expand consumption and investment”, according to the People’s Bank of China (PBoC), the central bank.
Local policymakers have also intervened to shore up demand. The Beijing and Shanghai municipal governments, for example, cut down payments and mortgage interest rates further in December, with Beijing municipal agencies lowering the former for first-time homebuyers to 30 percent from 35 percent for regular home purchases and dropping down payments for second-home buyers from 60 percent to 50 percent in urban areas and 40 percent in non-urban areas for regular home purchases. They extended the maximum term for mortgages from 25 to 30 years.
According to state media publication Global Times, moreover, a Central Economic Work Conference held in mid-December focused primarily on mitigating real-estate sector risks as well as addressing the “reasonable financing needs” of real-estate enterprises of different ownerships and expediting the creation of a new development model for the sector. Dong Jianguo, the deputy head of the Ministry of Housing and Urban-Rural Development, confirmed that regulators have issued policies to resolve developers’ debt-default risks but acknowledged that they will take time to be fully effective. “We will continue to cooperate with financial regulators to implement policy support without discrimination, meet the reasonable financing demand[s] of developers of various ownerships, and support developers with short-term cash flow troubles,” Dong Jianguo stated.
But markets remain on edge in early 2024 as the real-estate crisis continues, with a late-December consensus forecast from 10 investment banks and securities brokerages, including Goldman Sachs, Morgan Stanley and UBS Group, expecting the slump in China’s housing construction to continue this year, thus implying that government measures to stabilise the sector remain insufficient. As reported by Bloomberg on December 27, Goldman economists expected a double-digit contraction in real-estate fixed-asset investment this year, with the property sector reducing real GDP growth by one percentage point. Morgan Stanley, meanwhile, predicted the same real-estate investment measure dropping by 7 percent, and UBS forecasted a 5-percent decline. China’s banks are similarly bearish; China Merchants Bank International, for example, pencilled in a 7-percent decline in real-estate investment this year.
Should such bearish projections transpire, prospects for economic resurgences for China and the rest of the world would be severely dampened. Indeed, a growing chorus of analysts have voiced their fears that an underwhelming economic performance lies in store for 2024, with S&P Global Ratings suggesting that China’s GDP growth could fall below 3 percent. The rating firm’s downside scenario, to which it assigns a 20-percent likelihood, would see a further 20-to-25-percent decline in 2024 property sales from 2022 levels, which, in turn, would cause China’s real GDP growth to drop to 2.9 percent in 2024 from a base case of 4.4 percent. “Property pain is dragging on China’s economic rebound, which further hits property sales in a negative feedback loop,” according to Eunice Tan, head of credit research for Asia-Pacific at S&P Global Ratings. The International Monetary Fund (IMF), meanwhile, recently trimmed its forecast for China’s growth in 2024 to 4.2 percent, citing headwinds from the real-estate sector as the chief factor.
S&P also noted in its October 2023 outlook for China’s growth the substantial impact of such a downside scenario on several key industries, including real estate, local and regional governments, engineering and construction, commodities and, perhaps most significantly, the banking sector. “We expect the nonperforming asset (NPA) ratio of Chinese commercial banks to increase to 6.1 percent in 2023, 7.0 percent [in] 2024, and 6.0 percent in 2025, compared to our July 2023 estimates of 5.4 percent, 5.0 percent and 5.0 percent, respectively,” the rating agency stated. “This will push up annual credit losses to Chinese renminbi (RMB) 2.9 trillion over 2023-2025, 18 percent above our previous estimate of RMB2.4 trillion. Concurrently, slower economic growth in our downside scenario over 2023-2024 would likely lead to a spike in forborne loans, before a recovery in 2025 alleviates pressure on asset quality.”
The Nomura Group has stated it anticipates increasing impatience emerging from homebuyers whilst waiting for their purchased new homes to be delivered amid the persistent credit woes blighting property developers, which, in turn, could force the government’s hand further. “At some point next year, the issue of home delivery could turn into a social issue and endanger social stability, and Beijing may eventually need to significantly ramp up policy support,” the Japanese bank’s November report added. “We see this as the key to truly restoring the confidence in the property sector and economy.”
Others have shared their expectations of a much longer trajectory for China’s real-estate sector to recover fully. Oxford Economics recently suggested a four-to-six-year timeline for developers to complete unfinished residential properties. “However one slices the data, the existing excess supply in the market is likely to take at least another four years to unwind, absent a meaningful pickup in demand,” Oxford Economics’s lead economist, Louise Loo, stated in a report published in early December, noting that developers’ inventory is far too large for households to absorb quickly. “Increasing supply coming from secondary market transactions—as households, worried about depleting profits from price declines, sell their second or third homes—is an additional drag to this process.”