David Thacker
Real estate has been vital to the economy of China for generations. It has helped drive up the growth of its economy over the decades and accounted for as much as 20 % of activity. As Kavan Choksi Finance Expert says, this reliance, however, has been accompanied by the buildup of considerable risks. There are several hundreds of presold but unfinished homes present across China now. The downfall of China’s longstanding real estate bubble, initiated by the implementation of the “three red lines” policy in August 2020 to curb excessive borrowing by property developers, has hampered both investor and consumer confidence.
Kavan Choksi Finance Expert briefly discusses the property market and economy of China
Home prices became quite stretched relative to household incomes in the decade prior to the Covid-19 pandemic. This happened in part because consumers preferred to invest their major savings in real estate owing to the scarcity of attractive alternative savings options. Rising demand and expectations encouraged developers to borrow at a rapid pace.
Authorities in China have been recently focused on containing the risks associated with the real estate market and help the sector to transition to a more appropriate, sustainable size. Resolute actions are been undertaken to rein in excessive developer borrowing as well as manage other property sector risks. The real estate activity in the country has sharply contracted, due to which the authorities are trying to expand affordable housing, upgrade under-developed urban neighbourhoods and boost rental housing.
In certain respects, the progress in downsizing the real estate sector in China has been rapid, with a property downturn in its third year. Housing starts have gone down by more than 60% relative to pre-pandemic levels. This marks a historically rapid pace that was only seen in the largest housing busts in cross-country experience in the last three decades. Moreover, real estate sales have also significantly gone down in the country owing to homebuyer concerns about lack of sufficient financing available to developers to complete projects, as well as the belief that the property prices may decline in the future.
As Kavan Choksi Finance Expert says, there are also many important property sector vulnerabilities in China that are yet to be addressed. A number of developers have become non-viable, but have managed to steer clear of bankruptcy due to the rules that allow lenders to delay recognizing their bad loans. This has invariably helped mute spillovers to real estate prices and bank balance sheets. A modest decrease has been seen in home prices largely because certain cities have sought to limit price declines through rules and guidance on listing prices.
In the years ahead, China’s real estate sector is anticipated to encounter increased challenges due to structural factors, notably demographic shifts. The demand for new housing is expected to decrease as the population shrinks and urbanization rates slow down. The substantial public subsidies provided in the previous decade facilitated the relocation of millions of individuals from older, less modernized buildings to newer homes. However, this demand is likely to be constrained, given the constrained fiscal conditions of local governments due to reduced revenues from land sales and a declining population residing in older housing.
