China has a big problem within real estate that will take years to resolve, according to analysis from Oxford Economics lead economist Louise Loo.
Looking at nationwide data — whether based on official estimates of unsold inventory or the construction-to-sales ratio — Loo found it will take at least four to six years for real estate developers in China to complete unfinished residential properties.
That means efforts to boost funding to developers and other efforts to resolve China’s property market problems don’t directly address the bigger issue of uncompleted homes.
“However one slices the data, the existing excess supply in the market is likely to take at least another four years to unwind, absent a meaningful pickup in demand,” Loo said in a report Tuesday.
“Increasing supply coming from secondary market transactions – as households, worried about depleting profits from price declines, sell their second or third homes – is an additional drag to this process,” she said, noting that “developers’ inventory is far too large for households to absorb quickly.”
Apartment homes are typically sold ahead of completion in China, making it critical that developers finish constructing the houses if they are to sell more.
But financing struggles and other issues have meant developers have had to delay home delivery times — discouraging future home sales.
On the extreme end, residential construction in the relatively poor province of Guizhou could take well over 20 years to complete, Loo said in an email, while it will likely take at least 10 years in several other provinces such as Jiangxi and Hebei.
Nomura last month estimated the size of unfinished, pre-sold homes in China is about 20 times the size of property developer Country Garden as of the end of 2022.
Real estate and related sectors have accounted for about a fifth to one-fourth of China’s economy.
Ratings agency Moody’s said late Tuesday it expects that share to decline, in-line with Chinese government objectives. However, the firm pointed out the resulting drop in land sales means local governments may face financial strain if they are unable to offset what’s been a driver of more than a third of revenue.
That means Beijing may need to step in, posing “downside risks to China’s fiscal, economic and institutional strength,” Moody’s said. It downgraded its outlook on China’s government credit ratings to negative from stable.
Moody’s expects China’s growth domestic product to slow to 4% growth in 2024 and 2025 and average 3.8% a year from 2026 to 2030. The firm maintained an “A1” long-term rating on China’s sovereign bonds.
Spillover?
Despite persistent property market troubles, Oxford Economics’ Loo doesn’t expect significant spillover to the rest of the economy.
“We think China’s housing downturn will tread a different path than that of the US, Spain, or Ireland 10-15 years ago, and is unlikely to trigger a broader financial crisis,” she said.
In those situations, falling house prices, mortgage failures and bank lending were interlinked, Loo said, pointing out the difference in China: the greater role of policy, state-controlled banks and more stringent mortgage terms.
Other analysts also expect China’s economy will take its own path.
“We do see some similarities between China’s situation and the economic stagnation in Japan after the latter’s property bubble burst in 1991,” S&P Global Ratings said in a report Monday. “However, S&P Global Ratings believes China can avert this outcome, helped by regulatory action and the strength of its banking and corporate sectors.”
CNBC