The Chinese real estate crisis has garnered unprecedented attention in both local and global economic circles due to its potential impact on the growth trajectory of the Chinese and global economies. Signs of a real estate downturn in China became evident starting in 2020, marked by financial troubles for several major property developers and an increasing number of real estate projects lagging behind their original timelines.
These developments have affected investor and buyer confidence in the Chinese real estate market amid a downward trend in Chinese economic indicators since the COVID-19 pandemic. Consequently, the Chinese real estate market has undergone an extended period of slowdown, characterized by rising unsold inventory, weak sales of new properties, and declining momentum in residential property prices.
In response to the worsening situation in the real estate sector, the Chinese government approved a package of measures this year aimed at reviving the sector. These measures include providing mechanisms for financing affordable housing programs and supporting incomplete real estate projects, along with offering tax incentives to market participants.
It is likely that the announced measures will gradually contribute to the revival of the Chinese real estate market, particularly in major cities like Beijing and Shanghai. However, the sales and price correction cycle is expected to take longer than anticipated, considering the unfavorable economic climate and the downturn in other economic sectors, especially manufacturing.
Erosion of Confidence:
The Chinese real estate crisis peaked when several property development companies faced difficulties in meeting their financial obligations in 2020, following the government’s introduction of the “three red lines” policy aimed at regulating the real estate sector and reducing corporate debt. Under this policy, strict restrictions were imposed on financing and liquidity from state banks to major property developers.
This policy led to financial collapse for many debt-laden developers. In 2021, Evergrande defaulted on over $300 billion in debt, forcing local authorities to make the decision to liquidate it by January 2024. Similarly, Country Garden, one of China’s largest property developers, is facing a severe financial crisis due to its massive debt of $205 billion, compelling it to adopt a debt restructuring plan.
The financial deterioration of several major real estate companies, alongside the increasing number of incomplete projects, has shaken the confidence of market participants in China’s real estate activity, coinciding with ongoing signs of declining performance in the Chinese economy and the manufacturing sector. The primary threat is that, if the risks in the real estate sector are not addressed, they will also impose pressures on the financial situation of local governments and Chinese banks with significant exposure to real estate loans.
It’s worth mentioning that Chinese banks’ exposure to the real estate sector reached 25.9% by the end of 2023, according to “S&P Global Market Intelligence.” Thus, both local and global circles are concerned that a worsening of the Chinese real estate sector will directly undermine the growth trajectory of both the Chinese and global economies, which will subsequently affect financial markets and numerous global industries.
Indicators of Decline:
The Chinese real estate market has suffered from a prolonged cycle of price stagnation and weak sales of new properties, increasing uncertainty about market conditions and the Chinese economy in general, as outlined below:
Decline in Real Estate Investments: The momentum for real estate investments in the Chinese market slowed over the first ten months of 2024, continuing from 2023. Investment in real estate development reached approximately 8.63 trillion yuan ($1.1 trillion), a year-on-year decrease of 10.3%, according to China’s National Bureau of Statistics. This decline reflects ongoing pressures on the sector due to credit constraints and the financial crisis faced by many real estate developers.
Decline in New Property Sales: Buyer confidence in the real estate market has dropped due to numerous issues plaguing the sector, particularly concerning the incompletion of many agreed projects. As a result, sales of new properties (residential, commercial, and business) fell by 32.8% from 2020 to 2023, with continued declines in 2024, as sales experienced a year-on-year drop of 20.9% between January and October 2024, and residential sales alone dropped by 22%.
Unsold Property Inventory: With new sales slowing down, unsold property inventory has continuously risen in 2023 and 2024, increasing by 22.2% in 2023, while inventory rose by 12.7% from January to October of the current year, with a 19.6% increase in residential properties during the same period.
Property Prices: Amid an oversupply of residential properties and the deteriorating situation in the real estate sector, residential property prices in China’s major cities faced downward pressure throughout 2024. Home prices in China decreased by 5.2% year-on-year in October 2024, following a 5.9% year-on-year decline in September 2024. The downward trend in the market is expected to continue in the near term, with predictions estimating an additional 5% drop in new home prices in 2025, according to “Fitch Ratings.”
Rescue Measures:
The Chinese government has swiftly implemented a package of measures this year to support the stabilization and revitalization of the real estate sector, including issuing a whitelist of eligible real estate development projects for bank loans. Additionally, the People’s Bank of China reduced the down payment requirement for first-time homebuyers by 5 percentage points to 15% in May and eliminated the minimum interest rate for mortgages.
Financing for “whitelist” projects amounted to 2.23 trillion yuan (306billion)asofOctober16,2024,withallocationsexpectedtoincreaseto4trillionyuan(306billion)asofOctober16,2024,withallocationsexpectedtoincreaseto4trillionyuan(550 billion) by the end of 2024. Alongside this previous financing package, the central bank has made available additional financing of approximately 300 billion yuan ($41.3 billion) to include unsold residential units in affordable housing programs.
The Chinese government took further steps in November to enhance the flexibility of the housing market and bolster domestic demand for properties. The Chinese Ministry of Finance provided tax incentives for housing transactions, including expanding the scope of the 1% deed tax to cover residential apartments of up to 140 square meters instead of 90 square meters only. Additionally, Shanghai eliminated the value-added tax on residential unit sales if the ownership exceeds two years.
Containing the Crisis:
The financing and incentives provided to the real estate sector reflect Beijing’s readiness to take drastic measures to revive the real estate market and restore confidence in the Chinese economy. These measures have already helped slow the pace of home price declines in China, particularly in major cities like Beijing, Shanghai, and Shenzhen. According to “Moody’s,” the announced stimulus measures are likely to help reduce the rate of decline in new contracted sales, at least over the next year.
However, other consulting and credit institutions believe that the real estate sector crisis, characterized by slowing price momentum and weak sales volumes, may continue into 2025, although at a diminished severity. Markets in non-major Chinese cities are still expected to face strong headwinds due to weak demand fundamentals and excess supply of residential and commercial units. This suggests that it may take a long cycle for the entire Chinese real estate market to correct its challenging conditions and return to normal rates.
In light of the aforementioned expectations, it can be concluded that the Chinese real estate market (especially in major cities) is undergoing a slow price correction cycle, which began with the government’s move towards stimulus measures to support investor confidence in real estate transactions. However, for the market as a whole to correct its conditions, the Chinese government is likely to continue providing additional financial and non-financial support to the sector in the near future, with the aim of restoring confidence in the real estate and economic activity in China as a whole.
