The real estate market in China is on the verge of collapse

China's real estate market, which makes up a significant part of the national economy, needs more government support to prevent further deterioration, analysts say.

Existing home prices fell in October the most since 2014, while the amount of outstanding real estate loans fell for the first time in history, said Larry Hu, chief economist at Macquarie, writes CNBC.

This indicates increased problems with both demand and supply.

The current policy is aimed at stimulating demand. However, according to the Macquarie report, the government was not "addressing the most important problem: the credit risk associated with developers".

"Without a lender of last resort, a crisis of confidence could easily occur as falling sales and rising default risks reinforce each other," the report said. “Indeed, some large developers have recently seen their credit risks increase rapidly.

Beijing has sought to reduce investors' high reliance on debt to spur growth, while curbing a spike in house prices that has made buying an apartment in big cities too expensive for many young Chinese households.

UBS analysts estimate that real estate and related sectors now account for about 22% of China's gross domestic product, down from about 25% in recent years.

Since November 2022, the Chinese authorities have implemented a series of measures aimed at improving access to financing for developers and reducing interest rates on housing loans.

However, real estate giant Country Garden defaulted on its US dollar bonds last month, according to a Bloomberg News report.

On the other hand, Nomura analysts estimated last week that around 20 million units have been sold across China, but not yet completed.

In China, apartments are usually sold before they are completed. The inability of entrepreneurs to complete construction on pre-sold properties prompted many apartment buyers last year to stop paying mortgages on apartments they have already purchased but have yet to receive.

Markets “overly optimistic”?

Recent data indicate that the problems in the real estate sector are only getting worse.

The average price of existing homes in 70 major cities fell 0.6% in October from the previous month, compared with a 0.5% drop in September, with China's biggest cities leading the decline, Nomura analysts said in report referring to official data.

This is a concern as larger cities are expected to have more sustained demand for homes due to job availability.

"China's real estate sector has yet to bottom out," the report said. "Markets appear to have been overly optimistic about housing stimulus policies over the past two months."

In recent days, policymakers have made an effort to signal greater support.

The People's Bank of China announced late on Friday that it had held a meeting with other financial regulators to allow lending to real estate developers that are "doing business as usual", in just one sign of support. According to the report, the authorities also called for the development of affordable housing.

"Continued emphasis on supporting property finance and debt resolution of local project finance authorities will continue to [help] prevent risk escalation," the report said.

"While fragile growth still requires a supportive monetary environment, the meeting is moving in the right direction, but more support is needed to boost private investment."

Shares in several major real estate companies were higher on Monday, with developer Sunac rising 5.9% on the Hong Kong stock exchange.

Magazin, 28. Nov. 2023.