Most apartments in China are sold before developers finish building them. Pictured here on June 18, 2022 are people selecting apartments at a development in Huai’an, Jiangsu province, near Shanghai.
Future Publishing | Future Publishing | Getty Images
BEIJING — China̵[ads1]7;s property sales are set to plunge this year by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings.
National property sales are likely to fall by around 30% this year – almost twice as bad as their previous forecast, the rating agency said, citing a growing number of Chinese homebuyers suspending their mortgage payments.
Such a drop would be worse than in 2008 when sales fell by about 20%, Esther Liu, director of S&P Global Ratings, said in a telephone interview on Wednesday.
Since the end of June, unofficial figures have shown a rapid increase in the number of Chinese homebuyers refusing to pay their mortgages across a few hundred unfinished projects – until the developers finish building the apartments.
Most homes in China are sold before completion, generating an important source of cash flow for developers. The companies have struggled to raise finance in the past two years as Beijing clamped down on its heavy reliance on debt for growth.
Now, the mortgage strike is hurting market confidence, delaying a recovery in China’s real estate sector until next year instead of this year, Liu said.
As property sales fall, more developers are likely to find themselves in financial distress, she said, warning that the drag could even spread to healthier developers “if the situation is not contained.”
There is also the potential for social unrest if homebuyers don’t get the apartments they paid for, Liu said.
Limited ripple effects outside the property
Although the number of mortgage defaults increased rapidly within a few weeks, analysts generally do not expect a systemic financial crisis.
In a separate note on Tuesday, S&P estimated that the suspended mortgage payments could affect 974 billion yuan ($144.04 billion) of such loans – 2.5% of Chinese mortgages, or 0.5% of total loans.
“If there is a sharp decline in housing prices, this could threaten financial stability,” the report states. “The government sees this as important enough to quickly roll out relief measures to address eroding confidence.”
Chinese policymakers have urged banks to support developers and stressed the need to complete apartment construction. Authorities have generally expressed more support for real estate since mid-March, while maintaining a mantra of “houses are for living in, not speculation.”
“What worries us is that the scale of this support is not large enough to save the situation, [which] now goes to [a] worse direction,” Liu said.
However, Liu said critically that her team does not expect a sharp decline in housing prices due to local government policies to support prices. Their estimate is a decline of 6% to 7% in house prices this year, followed by stabilization.
And while S&P economists estimate that about a quarter of China’s GDP is directly and indirectly affected by real estate, only a fraction of that 25% is at a risk level, Liu said, noting that the firm does not have specific numbers on the impact of the mortgage. strikes on GDP.
A bigger problem to solve
China’s real estate sector has been intertwined with local government and land use policies, making the industry’s problems difficult to resolve quickly.
In an analysis published Tuesday, Xu Gao, director of the China Chief Economist Forum, pointed out that the amount of residential space completed annually has actually not grown on average since 2005, while the amount of land sold has declined on average during that time.
The contraction contrasts with the rapid growth in both land sold and homes completed before 2005, when a new bidding process for land came into force, he said. The new bidding process tightened the supply of land and property, pushing up housing prices more than speculation did, Xu said.
Investors should only consider the best developers among high-yielding real estate debt in China, Goldman Sachs said in a report on Tuesday. “We see relative value in their lower dollar-priced bonds with longer durations.”
But overall, it’s a story of uncertainty in one of China’s biggest sectors.
“For us, the continued strain in the real estate sector combined with the uncertainty surrounding COVID measures suggests a darker outlook for China,” credit strategist Kenneth Ho wrote.
One possible scenario he laid out is one where credit concerns remain high but without real systemic concerns, creating a negative overhang for investor sentiment in high-yield credit markets.