After China Evergrande, the real estate crisis ‘has not reached the bottom’

After China Evergrande, the real estate crisis 'has not reached the bottom'

Chinese home buyers’ unwavering belief that real estate is an investment that cannot be lost has propelled the country’s property sector to become the backbone of its economy.

But over the past two years, as companies became burdened with massive debt and new home sales declined, Chinese consumers have demonstrated an equally unwavering belief: Real estate has become a losing investment.

This sharp loss of confidence in property, the main store of wealth for many Chinese families, is a growing problem for Chinese policymakers, who are making all-out efforts to revive the ailing industry – to little effect. The troubles of the country’s real estate sector came to the fore on Monday when a Hong Kong court ordered China Evergrande to cease operations and liquidate the company, which is saddled with more than $300 billion in debt.

Like the industry it once ruled, Evergrande also limped for two years after defaulting on payments due to investors. Evergrande, short of cash to pay creditors, tried to convince others that its apartments would remain a good investment. The market will definitely bounce back, as it did during the last recession.

But the recession, already the longest on record, is not only prolonging but also accelerating.

China’s housing sales to fall 6.5 percent in 2023. Sales in December alone were down 17.1 percent from a year earlier, according to Chinese investment bank Dongxing Securities. Investment for new projects also slowed down. Real estate development declined by 9.6 percent last year.

“The market has not yet bottomed,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis. “There is still a long way to go.”

Last year, even as China’s economy was expected to benefit from pent-up consumer demand after pandemic restrictions were lifted, the property market weighed on growth. Real estate accounts for about one-quarter of China’s economy.

The property sector began to stumble after Beijing introduced a series of regulations in 2020 aimed at curbing excessive borrowing by real estate developers, concerned about the housing bubble and its impact on the financial system. Without easy access to credit, developers struggled to repay loans and complete construction of properties sold in advance to home buyers.

Japanese financial services firm Nomura Securities estimates there are still 20 million units of pre-sold homes waiting to be built, which would require $450 billion in funding to complete.

Now China has withdrawn many of those restrictions. Financial regulators are urging banks to extend more loans to property developers. Last week, Xiao Yuanqi, deputy director of China’s National Financial Regulatory Administration, said, Said The country’s financial institutions had an “indispensable responsibility to provide strong support” to the property sector.

Mr Xiao said banks should not immediately cut loans to distressed projects but should instead find ways to support them by extending the time to repay loans or releasing additional funds. Last week, China’s central bank and finance regulator said it would allow some developers to use bank loans for commercial properties to repay other loans or bonds.

Since 2021, more than 50 Chinese property firms have defaulted on loans, including two companies that once dominated the country’s housing market: Evergrande and Country Garden. Country Garden, once Evergrande’s main rival for industry leadership, effectively defaulted in October. The condition of the company has worsened as its sales have fallen.

Country Garden said pre-sales of unfinished apartments, an important indicator of future revenue, fell for the ninth consecutive month in December to 6.91 billion yuan, or $962 million. This was 69 percent less than a year earlier. In the second half of 2023, pre-sales fell 74 percent from a year earlier.

In a research note this month, Macquarie Group chief China economist Larry Hu said the property decline was “self-fulfilling”, as property developers’ debt crisis kept buyers away and pressured home sales, while new business There was a shortage of capital, which deepened the financial problems of those firms.

“The main thing to watch in 2024 is when the central government will step in and take the main responsibility for stopping the infection,” Mr Hu wrote. He said Chinese authorities could bail out property developers, just as the U.S. government did with the Troubled Asset Relief Program, or TARP, during the global financial crisis.

When China moved to cool down real estate several years ago, it took a step to prevent speculators from buying homes. Home buyers were required to make large down payments, discouraging people from purchasing additional property.

Suzhou, a city in eastern China, has lifted most of its home purchase restrictions, lifting limits on the number of homes a person can buy and waiving any residency requirements, state media reported Tuesday.

But even relaxing the rules has not helped in lifting the market. China’s outstanding mortgage loans fell 1.6 percent last year compared to 2022, a year when businesses and residents in many cities were still struggling with pandemic lockdowns. it, According to Chinese business magazine Caixin suffered its first decline in nearly two decades. By 2021, mortgages were growing at more than 10 percent annually.

A major cause of concern for some potential home buyers remains the large amount of incomplete, already sold apartments. For years, home buyers would agree to purchase new apartments and begin paying mortgages several years before the units were built. This led to an uproar when some property developers stopped construction on already sold apartments because they lacked funds to pay contractors and builders.

While the government has encouraged companies to complete construction on already sold apartments, there are still many projects that have not been completed.

Nidia Duan, a 19-year-old college student in Zhuhai, in the southern province of Guangdong, said her family offered to buy her a house when she turned 18, but she resisted because she was worried about buying an unfurnished apartment.

While housing prices have declined in recent years, Ms. Duan said she was generally pessimistic about the real estate outlook, and she preferred to keep her family’s money in cash.

“I’m still reluctant to buy it,” she said. “I will consider it when the property market is more stable.”

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