China's Housing Market Crisis Deepens: Falling Prices, Rising Inventories, and Uncertain Recovery Ahead

Chinese Housing Market Continues to Decline

China's housing market continues to face a significant downturn, as evidenced by declining property prices and a shrinking sales volume in August. In 70 major cities, new home prices dropped by 0.7% month-over-month, while existing home prices fell by 0.9%. This decline marks a slight acceleration compared to the previous month, signaling persistent challenges in the real estate sector. The total sales area of commercial housing also decreased year-on-year by over 10%, highlighting the severity of the market's struggles.

Key Indicators of Market Decline:

• Decreasing Home Prices: Both new and existing homes in major cities saw price declines, with new homes dropping 0.7% and existing homes 0.9%.
• Reduced Sales Volume: The commercial housing sales area experienced a significant year-on-year decrease of more than 10%.
• Ongoing Decline in Construction: New construction starts, ongoing projects, and real estate investments continue to decline, showing no immediate signs of recovery.
• Rising Inventory Levels: The inventory of unsold homes has reached a staggering 738 million square meters, surpassing the decade-long average by 23%.

This situation reveals the depth of the crisis, underscored by recent expert analyses. Despite efforts to stimulate demand through policy adjustments, the market remains sluggish. At least 48 million homes have been sold before construction was completed, emphasizing the complexity of the real estate crisis. The issue of unfinished apartments poses a significant challenge to market recovery, suggesting that resolving this crisis could take considerable time.

Broader Economic Concerns: China's economic slowdown extends beyond the housing market, with broader concerns emerging, such as declining property values, deflationary pressures, and stock market instability. The manufacturing sector has contracted, contributing to lowered overall growth forecasts. Nobel laureate Paul Krugman has warned of potential economic stagnation. Furthermore, the International Monetary Fund predicts a potential 50% drop in housing demand over the next decade, reflecting the long-term challenges facing the economy.

Despite these challenges, there are some positive signs, such as a recovery in factory activity and the luxury sector, which offer a glimmer of hope. However, these indicators are not enough to counterbalance the overall downturn in the housing market.

Government Interventions and Their Impact: In response to the crisis, the People's Bank of China (PBOC) has introduced several measures to support the housing market. It announced a relending program of RMB300 billion aimed at helping local governments purchase existing housing inventory and convert it into public housing. Additionally, the PBOC has removed the nationwide floor for mortgage interest rates, giving local governments the discretion to lower mortgage rates.

However, these interventions are seen as insufficient to significantly alter the sector's current trajectory. The focus appears to be on ensuring high-quality growth and market stabilization rather than stimulating new development. This approach may not be enough to turn the sector from a drag on growth into a driver of economic recovery.

Outlook and Future Challenges: Market sentiment remains cautious, and experts suggest that the downturn may still be in its early stages. Goldman Sachs has drawn parallels to the 2008 U.S. housing bust, predicting further declines in home prices, housing starts, and new home sales. The primary concern is preventing the housing market crisis from spilling over into other sectors of the economy. The complexity and scale of the crisis imply that the path to recovery could be prolonged and multifaceted.

In summary, China's housing market is in a precarious state, marked by declining prices, reduced sales volumes, and a growing inventory of unsold homes. Despite government interventions, the market shows no immediate signs of recovery. Broader economic challenges add to the uncertainty, suggesting that the road ahead will be challenging for the real estate sector and the Chinese economy as a whole.

Key Takeaways

• Prices of new and existing homes in 70 major cities dropped by 0.7% and 0.9% respectively.
• Commercial housing sales area experienced a year-on-year decline of over 10%.
• New construction starts, ongoing projects, and real estate investment observed ongoing declines.
• The inventory of unsold homes reached 738 million square meters, surpassing the average of the past decade by 23%.
• National housing prices, after stabilizing in July, experienced a further decline in August.

Analysis

The continuous downturn in the Chinese housing market can be attributed to oversupply, weak demand, and regulatory controls. Short-term effects encompass financial pressure on developers, potential defaults, and reduced consumer confidence. Long-term outcomes could entail a restructuring of the real estate sector, consolidation among developers, and heightened government intervention. Major entities affected include prominent developers such as China Vanke and Evergrande, financial institutions exposed to real estate debt, and local governments dependent on land sales. Although the situation could achieve stability through additional policy support and market adjustments, it is accompanied by significant risks.

Did You Know?

• Prices of new and existing homes in 70 major cities dropped by 0.7% and 0.9%: This signifies a month-over-month decline in the prices of newly built and existing homes in 70 major cities across China, indicating a substantial softening in the housing market and a weakening demand despite policy efforts to stimulate it.
• Commercial housing sales area experienced a year-on-year decline of over 10%: This demonstrates that the total sales area of commercial housing, encompassing residential, office, and retail spaces, decreased by more than 10% compared to the corresponding period last year. The significant yearly decrease in sales volume underscores the ongoing challenges in the real estate market, reflecting reduced consumer confidence and potentially stricter credit conditions.
• The inventory of unsold homes reached 738 million square meters, exceeding the decade-long average by 23%: A figure of 738 million square meters represents a 23% increase over the average inventory levels of the past decade, signifying an overriding concern as it suggests an oversupplied market, which could lead to further price declines and financial pressure for developers.