What China’s grim property market prospects mean for the economy

Measures meant to support the market do not appear to have taken effect, and recent news of property defaults shows headwinds remain strong
The importance of land sales, which have been sluggish, suggest the property sector will be a significant drag on economic growth

Hao Zhou

Published: 4:30pm, 1 Mar 2022

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Since the Chinese authorities vowed to stabilise the economy at the central economic work conference, overall economic policy has shifted to easing mode. In the real estate market, many supportive measures reportedly have been rolled out.

Have these measures effectively helped the property market so far? Unfortunately, according to the latest data, the answer is probably “not yet”.

Let’s look at several different indicators to gauge the temperature of China’s housing market. First, new home sales in the 30 biggest Chinese cities declined by more than 25 per cent on a year-on-year basis in the first eight weeks of 2022, and there is little sign sales will pick up any time soon.

In addition, land sales in 100 large and medium-sized Chinese cities were less than half of the same period in 2021. As the volume of land sales is a leading indicator for property investment, the weak land sales at the beginning of 2022 point to a rather weak fixed asset investment outlook.

The trend in property prices is still soft. According to property price data released by the National Bureau of Statistics, the composite price in 70 medium- and large-sized cities has declined on a year-on-year basis. Notably, there is a big divergence between different tiers of cities.

For instance, new home prices in first-tier cities increased by 4.4 per cent year on year in January, the same as the previous month. However, new home prices in third-tier cities only grew 0.5 per cent, 0.4 percentage points lower than December 2021. Moreover, second-hand property prices in third-tier cities fell 0.7 per cent year on year while prices in first- and second-tier cities were still in positive territory.

The divergence in property prices among Chinese cities echoes the country’s demographic dynamics as underdeveloped areas are suffering massive population outflows. In the meantime, property prices in coastal cities are more resilient as young people move to big cities in search of better jobs and better education for their children.

The picture of China’s real estate market remains grim, suggesting that supportive measures have not yet taken full effect. While the relatively high base of early last year might have masked some of the policy effects, recent news of property defaults shows headwinds continue to be strong.

One of many struggling privately owned Chinese developers, Zhenro, confirmed investors’ fears on February 18 when it said in an exchange filing that it might not have enough cash to meet its debt payments in March. The company is asking bondholders to waive any default claims that arise from a failed redemption of its US$200 million perpetual note on March 5.

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The overall tone in the property sector remains tough as the authorities stick to the policy of “housing is for living in, not for speculation”. Despite sluggish property and land sales, local governments are reluctant to roll out strong supportive measures. Hence, we can only expect some marginal easing from these authorities.

Heze, a small city in Shandong province, lowered mortgage down payments for first-time homebuyers to 20 per cent from 30 per cent in mid-February. This triggered speculation that such policies would be expanded to more cities, but this only took place in a few small cities.

Given the oversupply conditions in most lower-tier cities, a 10 per cent reduction in down payment is unlikely to encourage people to buy property as there is some downside bias to property prices in these cities. In addition, while commercial banks have reportedly accelerated mortgage loan approval, there is little sign that financing for property developers has been eased, which is illustrated by Zhenro’s default.

Sluggish land sales also suggest that property developers are not in a shopping mood for the time being. This either points to a gloomy outlook among property developers or that commercial banks are reluctant to provide credit, particularly to troubled developers. In either case, the property market is far from stabilising.

The market needs to be patient, it is still too early to see green shoots in the property sector. A slow recovery in the property market will certainly have far-reaching effects on the economy. As the property sector is closely associated with many industrial sectors, continued property weakness means the manufacturing sector is likely to remain lukewarm for the foreseeable future.

Some might argue that strong government spending in the form of infrastructure investment will help the Chinese economy in the coming year. However, the market should not underestimate the importance of land sales for local governments’ fiscal revenue, and a big chunk of land sale revenue is used for infrastructure investment.

Total land sales revenue was 8.7 trillion yuan (US$1.4 trillion) in 2021. In Beijing, the government projects that land sales will fall by 18.8 per cent this year. Applying this ratio to the whole country, land sales revenue would be at least 1.5 trillion yuan lower than its level last year.

Although the local government special bond quota is likely to be increased during the upcoming National People’s Congress, the level will still be significantly lower than the shortfall in land sales. Putting all these factors together, the conclusion is clear: weakness in the property sector will remain a significant drag on economic growth in the coming year.

Hao Zhou is senior emerging markets economist at Commerzbank