China’s Plunging Housing Market is Only Halfway to the Bottom, Say Analysts

Despite three years of plunging prices and government rescue efforts, the end of China’s housing downturn is nowhere in sight; in fact, the slide is just about at its halfway point.

That is according to recent reports from Goldman Sachs and Paris-based asset manager Amundi Investment Institute (Amundi). Housing starts are likely to stay depressed and home prices will drop significantly over the next two years, particularly in larger cities, the reports said.

“We estimate that real house prices in China declined 16 percent from the peak in the third quarter of 2021 to the third quarter of 2023. If the US experience is of any guidance, we are only halfway through the downward price adjustment in the current housing downturn,” global investment bank Goldman Sachs said in a client note, viewed by The Epoch Times, on Monday.

New housing construction and new home sales have been hit harder than house prices, and both are expected to remain sharply depressed for the next several years due to the substantial inventory overhang, Goldman added.

China’s property sector, which accounts for a quarter of its economic activity, and where around 70 percent of household wealth is parked, is weighing heavily on household consumption and saving. The impact is rippling across the economy and clouding its recovery.

Every 5 percent decline in home prices wipes out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics. As property owners feel poorer after a sharp fall in home prices, they tend to cut down on spending to rebuild their fortunes.

According to Bloomberg data, 34 out of China’s top 50 developers have defaulted on their debt obligations at some point over the last two and a half years.

However, the most pressing issue for a sustainable property market is the completion of pre-sold houses, which are typically paid for in full upfront rather than with a deposit or down payment.

Experts say property prices are sliding below sustainable levels, because buyers fear that their purchased houses may never be delivered.

Given China’s restrained easing and deteriorating supply and demand dynamics, house sales are likely to drop 10-15 percent per year in 2024-25, before momentum stabilizes and the market enters a “a gradual decline mode,” Amundi added.

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Structural Reasons for Property Sector Woes

According to Goldman, structural reasons, specifically China’s “unique land supply mechanism,” are the prime contributors to China’s property sector woes.

As a kind of shadow financing, Local Government Financing Vehicles (LGFVs) provide a conduit for local governments to borrow money from banks, typically using property as collateral.

Local governments in China also sell industrial land at a fraction of the price of residential land, therefore residential land sales indirectly subsidize industrial land supplies. Residential land sales are the main source of total land sales revenue.

The IMF report noted that “China’s housing market faces additional pressures in coming years from structural factors, in particular demographic change.”

The need for additional new housing will continue to diminish in coming years as China’s population declines and urbanization slows, it added.

“Large public subsidies in the previous decade helped millions of people move to newer housing from older buildings lacking modern amenities. Such demand will likely be more limited as depressed land sale revenues have tightened local government fiscal constraints and fewer residents live in older housing,” the IMF report said.

China’s birthrate has been decreasing for years, and last year, for the first time in sixty years, the country’s death rate exceeded its birthrate. Its population dropped by 2.08 million in 2023, according to January figures from China’s National Bureau of Statistics.

As China’s population drops, the impact on households and, consequently, the demand for housing, will be significant, according to the Amundi report. Urban households are projected to reach 7 million units in 2026, before falling dramatically to 4-5 million in 2030, the report predicted.

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Learning From the U.S. Housing Crisis

Given that homebuyers and sellers are typically individuals rather than financial experts, sales prices are often projections of recent transactions, and physical property inventory excess persists for years, housing busts, once started, often continue for years, warned Goldman, citing the 2008 U.S. housing market crash.

U.S. real home prices peaked in 2006 and bottomed out in 2012, over a period of six years. Homeowner vacancy rates peaked in 2008; it was a decade before they would fall back to their long-term average.

Although the Chinese housing market will not follow the exact path that the U.S. housing market did, there are lessons China can draw from the U.S. subprime crisis, noted the global investment bank.

First, deleveraging is a difficult process for the economy. In the United States and elsewhere, deleveraging mostly happened in the household sector. In China, however, highly indebted developers and local governments are feeling the pain of paying off their debt.

Second, banks act very cautiously after a housing bust. In the United States, the early 2000s saw rapid growth in private-label mortgages, leading up to the height of the subprime credit boom in 2004-2006. When the financial crisis hit, private-label mortgages virtually disappeared.

In China, even though financial regulators have encouraged banks to lend more to real estate developers who are cash-strapped, banks are still reluctant to lend because they don’t want to lose money on loans that aren’t paid back. Clearly, the government now needs to step in with guarantees to increase bank lending, according to Goldman.

Finally, policymakers must reduce negative spillovers triggered by the housing collapse. During the U.S. subprime crisis, negative spillovers included scores of involuntary foreclosures. They also included damage to the financial system through products like collateralized debt obligations (CDOs). CDOs created a false sense of risk diversification and spread financial contagion as mortgage defaults increased. The housing crash caused the CDO market—which was backed by subprime mortgages—to implode as well, losing hundreds of billions of dollars for financial services institutions.

In China, the negative spillovers include pre-sold homes left unfinished by liquidity-strapped developers, forcing buyers to choose older homes over new ones and exacerbating developer cash flow problems. Spillovers also include declining land sales, and local governments responding to stress by slashing spending and failing to pay employees, further weakening the economy and the housing market.

China needs to take forceful action to support local governments and banks, recognize non-performing loans, and ensure the timely delivery of pre-sold homes, the Goldman note concluded. “Absent such decisive actions, negative spillovers are likely to prolong the economic damage of the housing downturn.”

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