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Home prices have fallen in China, developers have defaulted on their debt, and many housing units are still uncompleted.
Wang Zhao/AFP via Getty Images
With Beijing stepping in to help China’s beleaguered property market, many believed the sector’s crisis may be averted. New situations are causing reconsideration of that optimism.
After years of boom times, property prices are experiencing near-unprecedented declines. New home prices in June fell for the 10th straight month, even as the government is enacting measures to support the sector.
More than 30 Chinese developers have defaulted on their dollar debt or pushed out bond maturities because they can’t sell new offshore debt,
Deutsche Bank
’s
Owen Gallimore told The Wall Street Journal.
Various Chinese analysts Barron’s spoke to gave varying reasons why the property market at best needs further reform, at worst is headed into a deeper crisis.
Huang Qifan, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress, told Chinese media that continued construction should essentially just cease.
“China has no need for new construction,” he said. Many units are unoccupied investment properties for citizens who already have primary residences, yet China’s population has peaked and will begin to quickly decline. Construction and renovation on public facilities like schools and hospitals have essentially been completed, he said.
Chinese media last week quoted other analysts as saying that China’s property demand has peaked for the next decade, due mainly to the aging population, as happened in Korea and Japan. Repeated demographic studies have concluded that China is headed toward a demographic crisis, with too many older citizens, a dwindling pension system, and not enough new births to support near-future taxation and social-related revenue.
For Ting Lu, chief China economist for
Nomura
,
there is a vicious cycle happening in China’s property sector.
The primary problem is a simple confidence crisis among would-be buyers because they don’t trust that units will even be finished. A widespread mortgage boycott among home buyers recently deepened the crisis. Depending on the breadth and duration of the boycott, refusals to pay could devastate the sector, as new home purchases account for more than 80% of China’s property industry.
This adds insult to injury, as private developers fund new projects using 50% of their income from new home sales, Lu said. “The continued contraction in new home sales will further squeeze the funding for developers and make it even harder for developers to build homes,” he told Barron’s.
But the problem does not end there. In China, 30% of local government revenues come from land transfers. As home sales fall, developers purchase less land, and this can crush municipalities’ income. This translates into governments downsizing or reducing staff pay—“a social class with relatively stable income and housing demand, leading to even weaker new home sales in those cities,” Lu said.
Developers and local governments aren’t the only ones to suffer.
“If this sales and funding recovery doesn’t play out, developers could impose on investors steep haircuts on their bondholdings and long extensions to tenors, to manage their high debt burden,” S&P Global analysts wrote in a note Monday.
“The end of the beginning is at hand for China developer defaults. In the first stage, firms asked investors to exchange or extend defaulted bonds, to buy some time until the property market recovers. In the next stage, we assume investors will lose patience for such deferrals, especially if home sales do not soon recover,” they added.
National authorities have stepped in with credit easing and less strict mortgage and other homeownership requirements. Localities have cut mortgage interest rates and lowered down payments.
But these seem to be losing the battle against the myriad forces depressing the sector.
For
Morningstar
’s
senior China real estate analyst Cheng Wee Tan, “The effectiveness of mortgage lending rate cuts is limited by lockdowns, with limited impact on consumer sentiment; reopening and buyer sentiment recovery are more key in our view,” he told Barron’s.
For Nomura’s Lu: “We still don’t see a swift and strong recovery of the property sector in 2022 due to the highly infectious new variants of Covid-19, the reduced confidence of Chinese households, the frontloaded demand of new homes in 2015-2018 in low-tier cities, and the vicious cycle mentioned above.”
As for stock implications, Morningstar analysts were bearish about the sector and the effects of government measures, but said the current situation offered small buying windows. They prefer state-owned developers in China, “which have strong balance sheets to take market share away from private developers,” they said in a note Wednesday, citing
China Overseas Land & Investment
(688.Hong Kong) as one example.
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