After posting record-high trade surpluses in 2020 and last year on the back of global demand for COVID-19 pandemic-related supplies, China’s economic growth this year has been the slowest among Asia’s developing economies.
China’s economic slowdown can be attributed to multiple factors, but instead of tackling the root causes of the slowdown, Beijing has turned to the easiest approach — stimulating the real-estate sector.
After all, it was the booming real-estate industry that saved China from an economic hard landing during the 2008 financial crisis, which left many countries underwater for a decade.
Back then, China pumped 4 trillion yuan (US$562 billion at the current exchange rate) into the economy to keep it afloat. Most of the funds were funneled to the real-estate sector, directly and indirectly, regardless of the original funding objectives. The stimulus has led to a 20-year housing market boom.
China’s real-estate sector, which had its beginnings in the 1990s, is a fairly new creature compared with its counterparts in other countries.
However, in the course of its 30-year growth, the sector has evolved from a temporary and experimental tool intended to relieve the government of its burden to house public employees to a mighty economic powerhouse that made up at least 30 percent of China’s GDP at the time the pandemic hit.
However, the industry changed course soon afterward and its downturn became obvious in the second half of 2020, along with an overall economic deterioration.
Under mounting economic pressure, the Chinese government turned its magic wand to its old toolbox — the property sector — for much-needed economic vigor, waiting for the 2008 miracle to repeat itself.
However, this time around, the expectation will likely turn into a great disappointment. A widely held view among economists is that China’s property sector is financially choked by the “three red lines” policy that aims to lower developers’ debt leverage.
The industry is also paralyzed by Beijing’s “zero COVID-19” policy that aims to safeguard China’s pandemic control achievements, once the envy of the world.
Economists have suggested easing the two policies to turn the economy around.
However, idling developers make up only a small part of China’s big housing headache. Property sales have so far this year fallen more than 20 percent, worse than a 10 percent decline forecast in May and worse than the dip during the 2008 crisis.
The decline in property sales cannot be attributed to the so-called “unfinished rotten projects,” which have over the past few months triggered widespread protests by home buyers trapped by mortgage contracts for properties that have not been, and might never be, completed.
However, properties in this category account for only 5 percent of total floor area under construction, not to mention that the “rotten” phenomenon has been a hallmark of China’s property developers for at least 20 years.
Ironically, new home prices fell only 1.4 percent this year.
However, this relative stability is artificially sustained by the government’s price-fixing policy that forbids developers from cutting prices.
Clearly, a lack of home buyers, rather than stalling developments, is the real threat to the survival of China’s property sector. The recommended easing of regulations would not turn the fleeing masses into enthusiastic property buyers.
To reveal the secret behind property buyers’ reluctance, one must not ignore three fundamental phenomena in China’s housing market:
The first is buyers’ motivation. In China, real estate is regarded more as an investment tool than a necessity. Except for a brief downturn during the 2008 crisis, China’s home buyers have not seen a real price correction yet. This leaves people with the illusion that property prices have only one way to go: up. Property price appreciation, in combination with a lack of other investment avenues for ordinary people, has lured the entire population into the get-rich-quick real-estate train since the 1990s.
However, the train eventually lost momentum. The downturn started with resales. Property resale prices started to drop in 2018. By the end of last year, the value of resale properties nationwide had dropped more than 20 percent from their all-time highs. Although this alerted a few shrewd property buyers, the majority were still convinced that prices would continue to rise indefinitely, albeit at an ever-slowing rate.
However, a reversal in new property prices over the past few months struck the decisive blow that finally broke property buyers’ nerve. As real estate could no longer reward them with expected price increases, they no longer had any motivation to jump into the market.
The second phenomenon stems from the aforementioned 30-year property zeal, which resulted in an enormous amount of unsold and unoccupied properties. As people treated real estate as a wealth-churning machine, everyone wanted to own as many properties as they could. By the end of 2018, 80 percent of families in China owned one or more properties, and more than 20 percent of sold properties were left empty — defined as zero utility for at least six months. To keep up with property buyers’ insatiable appetite, developers have been dumping at least 1 billion square meters of new residential properties on to the market each year since 2013.
Currently, the estimated total floor area under construction in China is 4.5 billion square meters, which means 45 million units of 100m2 dwellings would enter the already oversaturated property market if the industry returns to full capacity — a scenario that would not help ignite buyers’ lost enthusiasm.
The two phenomena lead to the third: diminished family wealth.
People in China have seen their wealth grow rapidly over the past 30 years. However, housing affordability in China is only one-fifth to one-10th of that in the US, as measured by price-to-income ratio.
For the Chinese working class, buying a piece of property often means spending their family’s entire savings and half of their salaries on down payment and mortgage payments. Real estate has swallowed 70 percent of China’s accumulated family wealth after 30 years of wild expansion.
The Chinese government has unleashed a string of incentives, such as purchase subsidies, and punitive policies to lure people back into the property market.
However, with more people becoming unemployed in a country that lacks even the most basic social assistance, such as healthcare and childcare, those who are lucky enough to still have a job have learned that stashing away some extra money for a rainy day is much wiser than entrusting their money to real-estate developers.
The Chinese government is in a no-win situation as it tries to unravel its real-estate mess. If the government succeeds in forcing people back into the property market, the residual family wealth would be wasted by the sector, dampening the viability of the overall economy and leading to a recession.
If the attempt fails, insolvency would spread through the entire sector and beyond, leading to an economic hard landing postponed for 20 years. It is hard to tell which outcome would be worse, but neither is good for China’s economy.
Daniel Jia is founder of consulting firm DJ LLC Integral Services in Spain.
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