China’s property market, which makes up a substantial chunk of the country’s economy, needs more government support to prevent it from deteriorating further, analysts said.
Existing home prices fell in October by the most since 2014, while outstanding property loans fell for the first time in history, Larry Hu, chief economist at Macquarie, said in a note Friday.
That indicates increased drags on both the demand and the supply side.
Policy so far has focused on boosting demand. But the government hasn’t “addressed the most important issue: credit risk related to developers,” according to a Macquarie report.
“Without a lender of last resort, a self-fulfilled confidence crisis could easily happen as falling sales and rising default risks reinforce each other,” the report said. “Indeed, some large developers have recently seen their credit risks rising rapidly.”
Beijing has sought to reduce real estate developers’ high reliance on debt to fuel growth, while tamping down on a surge in home prices that has made buying an apartment in major cities prohibitively expensive for many young Chinese households.
UBS analysts estimated that real estate and related sectors now account for about 22% of China’s gross domestic product, down from around 25% levels seen in recent years.
Since November 2022, Chinese authorities have rolled out a raft of measures aimed at improving developers’ access to financing and reducing mortgage rates.
However, real estate behemoth Country Garden still ended up defaulting on a U.S. dollar bond last month, according to Bloomberg News.
On the homebuyers side, Nomura analysts last week estimated about 20 million units across China have been sold — but not yet completed.
Apartments are typically sold ahead of completion in China. Developers’ inability to finish construction on pre-sold properties prompted many homebuyers last year to stop mortgage payments on homes they had already bought but had yet to receive.
Markets ‘too optimistic’?
Recent figures indicate that property sector troubles are only worsening.
The average price for existing homes across 70 major cities fell by 0.6% in October from the prior month, compared with a 0.5% drop in September, with China’s largest cities leading declines, Nomura analysts said in a report last week citing official data.
That’s concerning since larger cities are expected to have a more sustained demand for homes due to the availability of jobs.
“China’s property sector has yet to bottom out,” the report said. “Markets appear to have been a bit too optimistic about the property stimulus policies over the past two months.”.
More high-level signals
Policymakers in the last few days have made an effort to signal more support.
The People’s Bank of China late Friday announced it held a meeting with other financial regulators to allow lending to real estate developers that are “operating normally”, among other signals of support. The authorities also called for developing affordable housing, according to the readout.
“The meeting should help avoid an undesirable contraction of credit extension in the final two months of the year, as financial institutions try to time new loan deals to the new year to engineer a strong start,” Citi analysts said in a report Monday.
“The continued emphasis on supporting real estate financing and LGFV debt resolution will continue [to help] prevent risks [from] escalating,” the report said. “As fragile growth continues to call for an accommodative monetary environment, the meeting is moving along the needed direction while more supports are still needed to boost private sentiment.”
Shares of several major property companies closed higher on Monday, with developer Sunac rising 5.9% in Hong Kong trading.
