China’s real estate slump is predicted to last for years, threatening the wider region

Weakness in China’s property sector could be a drag on the economy for years to come and could even affect countries in the wider region, Wall Street banks have warned.

“We see persistent weaknesses in the real estate sector, mainly related to lower levels of city and private developer funding, and believe there appears to be no quick fix for them,” Goldman Sachs economists led by China economist Lisheng Wang said in a weekend note .

Goldman’s economists said the property market is expected to see an “L-shaped recovery” – defined as steep declines followed by a slow recovery rate.

“We only assume an ‘L-shaped’ recovery in the real estate sector in the coming years,” they said.

Goldman Sachs economists also noted that there are expectations for China’s government to introduce more housing stimulus packages to support the sector.

“We believe the policy priority is to manage the multi-year downturn rather than engineer an upcycle,” the analysts said, adding that Goldman does not expect “a repeat of the 2015-18 cash-backed shantytown renovation program.”

They referred to China’s urban redevelopment project which aimed to renovate millions of dilapidated homes over a period of time to boost urbanization and improve livelihoods.

According to Reuters, the government invested about $144 billion in the first seven months of 2018 to compensate residents of homes that were demolished in an effort to boost home sales and prices in smaller cities struggling with unsold homes.

Another concern for the real estate sector is a big difference between state-owned real estate companies and private companies in the industry, said JPMorgan’s Asia Chief Market Strategist Tai Hui.

“I think the recovery is going to be slow, but I think there’s also a big difference between the state-owned developers who have done better in this current upturn versus the more private developers, who are still struggling,” Hui told CNBC. Squawk Box Asia” on Tuesday.

The real estate sector was also highlighted in a government jobs report released earlier this year, which called for support for people buying their first homes and to “help solve the housing problems of new urban residents and young people.”

Hui said the government’s pressure to limit property prices to a certain level may be missing a large portion of potential buyers.

“While the government has relaxed some of the policies in the last 6 to 9 months, I think the intention to maintain price affordability, i.e. not let prices go up too much … it really takes a large part of the potential buyer base out of the equation,” he said.

Morgan Stanley warned in its mid-year outlook report that further weakness in the property sector is likely to provide more headwinds to China’s growth.

“If challenges in the real estate sector deepen and bring risk aversion to the financial system and affect consumer confidence, this will lead to a deeper slowdown in China,” wrote Morgan Stanley’s chief economist Chetan Ahya.

Should monetary easing fail to support the ailing property sector, it would also raise concerns about a ripple effect in the rest of the Asia-Pacific region, the firm’s economists said.

A “downside risk would be if China’s real estate sector does not stabilize itself with the easing we expect,” they said. “In that scenario, confidence and economic conditions will tighten in China, which will have direct implications for China’s growth, but also negative spillover to the region.”

— CNBC’s Evelyn Cheng contributed to this report.