Saturday, July 20

After China Evergrande, the real estate crisis “has not hit bottom”

After China Evergrande, the real estate crisis “has not hit bottom”

Chinese buyers’ unwavering belief that real estate was an investment impossible to lose propelled the country’s real estate sector to become the backbone of its economy.

But over the past two years, as businesses collapsed under the weight of massive debts and new home sales plummeted, Chinese consumers demonstrated an equally unwavering conviction: Real estate has become a losing investment.

This sharp loss of confidence in property, the main source of wealth for many Chinese families, is a growing problem for Chinese policymakers who are doing everything they can to revive the ailing industry – with very little effect. The country’s real estate sector’s problems were laid bare Monday when a Hong Kong court ordered China Evergrande to cease operations and liquidate the company, which is saddled with debt of more than $300 billion .

Like the industry it once ruled, Evergrande limped along for two years after defaulting on payments it owed to investors. Evergrande, lacking cash to pay its creditors, tried to show that its apartments remained a wise investment. The market would surely rebound, as it did in previous recessions.

But the economic slowdown, already the longest on record, is not only continuing: it is accelerating.

In 2023, China’s housing sales fell by 6.5%. In December alone, sales fell 17.1% from a year earlier, according to Dongxing Securities, a Chinese investment bank. Investment in new projects has also slowed. Real estate development fell 9.6 percent last year.

“The market hasn’t bottomed yet,” said Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis. “There is still a long way to go.”

Last year, although China’s economy was expected to benefit from pent-up consumer demand after pandemic restrictions were lifted, the real estate market weighed on growth. Real estate accounts for about a quarter of China’s economy.

The real estate sector began to stagnate after Beijing, worried about a property bubble and its impact on the financial system, implemented a series of rules in 2020 aimed at curbing excessive borrowing by property developers. Without easy access to debt, developers struggled to repay loans and complete construction on properties sold in advance to buyers.

Nomura Securities, a Japanese financial services company, estimates there are still 20 million units of pre-sold homes waiting to be completed, which would require $450 billion in financing.

Today, China has waived many of these restrictions. Financial regulators are urging banks to lend more to property developers. Last week, Xiao Yuanqi, deputy director of the National Financial Regulatory Administration of China, said The country’s financial institutions had “an unavoidable responsibility to provide strong support” to the real estate sector.

Banks should not immediately withdraw loans to troubled projects, but should find ways to support them by extending loan repayment deadlines or launching additional funds, Xiao added. Last week, China’s central bank and financial regulator said they would allow some property developers to use bank loans for commercial properties to repay other loans or obligations.

Since 2021, more than 50 Chinese real estate companies have defaulted on their debts, including the two companies that once dominated the country’s real estate market: Evergrande and Country Garden. Once Evergrande’s main rival for sector leadership, Country Garden effectively defaulted in October. The company’s situation worsened as its sales collapsed.

Country Garden said pre-sales of unfinished apartments, an important indicator of future revenue, fell for the ninth consecutive month in December, to 6.91 billion yuan, or $962 million. That’s a 69 percent drop from the previous year. In the second half of 2023, pre-sales decreased by 74% compared to the previous year.

In a research note released this month, Larry Hu, Macquarie Group’s chief China economist, said the property crisis was “self-fulfilling” because property developers’ debt problems were keeping buyers away and putting pressure on home sales, while the lack of new business only increased. worsened the financial problems of these companies.

“The key thing to watch in 2024 is whether and when the central government will step in and take primary responsibility for stopping the contagion,” Hu wrote. He said Chinese authorities could bail out real estate developers, similar to how the U.S. government intervened during the global financial crisis with the Troubled Asset Relief Program, or TARP.

When China decided to cool down real estate several years ago, one of the steps it took was to prevent speculators from buying homes. Home buyers were required to make large down payments, which discouraged people from purchasing additional properties.

Suzhou, a city in eastern China, lifted most of its restrictions on buying homes, removing limits on the number of homes a person could buy and waiving any residency requirements, reports said. official media on Tuesday.

But even the relaxation of rules has not helped to lift the market. China’s outstanding mortgages fell 1.6% last year from 2022, a year when businesses and residents in many cities were still grappling with pandemic-related lockdown measures. Is this, according to Chinese business magazine Caixin, was the first decline in nearly two decades. Mortgages grew by more than 10% annually through 2021.

A continuing source of concern for some potential buyers remains the large number of unfinished and pre-sold apartments. For years, home buyers agreed to purchase new apartments and began paying a mortgage years before the units were built. This caused an uproar when some real estate developers suspended construction of pre-sold apartments because they did not have the funds to pay contractors and builders.

Even though the government has been pushing companies to complete the construction of pre-sold apartments, many projects are still not completed.

Nydia Duan, a 19-year-old student in Zhuhai, southern Guangdong province, said her family offered to buy her a house when she turned 18, but she resisted because she feared part of buying an unfinished apartment.

While property prices have fallen in recent years, Ms Duan said she was generally pessimistic about the prospects of real estate and preferred to keep her family’s money in cash.

“I’m still hesitant about buying one,” she said. “I will think about it when the real estate market is more stable.”