Note: This picture is made by Midjourney AI.
Property Market:
A Bright or Gloomy Future
April 2024
Li Qi, 30, who worked in a private eye clinic, purchased a house with her husband in Shenzhen Longgang District for 2.7 million yuan in 2022.
"I thought I would finally have a home in Shenzhen, but little did I know that buying a house would mark the beginning of endless worries and anxiety," she said.
The house Li bought experienced a price reduction of 600,000 yuan last year. And for this year, the price discount increased to 800,000 yuan.
"In just six months, a lot of money disappear, I can't imagine how much further it will plummet,” she said. “This loss hits me particularly hard because now salary cuts are happening across various industries, and everyone feels the looming threat of unemployment."
Meanwhile, in early 2023, Li's husband, who worked at a real estate company in Shenzhen, has been laid off. The company still owed him several months of unpaid wages and compensation, with no clarity on when they would be received, which has further exacerbated the financial burden on Li's family.
The view near li's house. (Photo provided by Li)
"We have cut down on all unnecessary expenses in our daily lives, and even what we eat now solely depends on what is cheaper; our quality of life has taken a nosedive compared to before," Li added.
For years, Chinese homebuyers firmly believed that real estate was the safest investment, and this belief propelled the country's real estate industry to become an economic pillar.
However, over the past three years, with real estate developers crumbling under the burden of massive debt and new home sales plunged, houses have seemingly become a losing investment shattering the long-held faith of homebuyers.
This dampened people's financial confidence as they felt less rich, which inevitably led to the shrinking wealth effect and eroded people's spending power.
According to Bloomberg-compiled data, as of September 2023, 34 out of the nation’s top 50 private-sector developers by dollar bond issuance have already experienced delinquencies on their offshore debt. So far, at least five companies have been ordered to close.
This includes China's Evergrande Group, which relied heavily on borrowing to drive its expansion. It was the largest borrower in terms of dollar-denominated debt among its counterparts and, for a period, held the title of the country's largest developer based on contracted sales.
On January 29, a Hong Kong court delivered the ruling after Evergrande failed to convince the judge of its viable proposal to restructure approximately US$300 billion in debts.
“The pandemic caused a global financial crisis. If without this financial downturn, the crisis may not have happened or may be delayed another 8 years,” said Wei Li-qun, Professor of Management at the School of Business at Hong Kong Baptist University.
In October 2023, Country Garden likewise experienced its first-ever default on a dollar bond. The company had held the position of the country's largest builder in terms of contracted sales for several years, but its ranking plummeted to seventh place in 2023.
Later in February, a Hong Kong-based creditor took further action by filing a winding-up petition against the developer.
Adding to the company's challenges, it delayed the publication of its 2023 financial results in late March, saying it needed to collect more information to make appropriate accounting estimates and judgments.
“Banks need to be incentivized to lend to the sector once again, but this is hard given the wave of defaults across the entire private sector developer universe that have been experienced,” said Koh Shern-Ling, a Singapore based Portfolio Manager at an investment management firm called Principal Real Estate Investors.
“Arguably, the only measure that might restore confidence is some form of bailout of the larger developers. But this is not part of the government’s plan at this point,” Koh added.
According to a January report from The Swiss Re Group, the decline in the property market can be attributed to a combination of cyclical factors, such as the slowdown in income growth during the pandemic, as well as structural factors, including the shrinking of working-age population in China, diminishing returns on investments, and slower growth in total factor productivity.
There are several major parts that consist of the whole China economy and real estate is one of them. And this not only refers to the property alone but many related side industries will also be involved, said Wei.
“So if properties cannot be sold, there's no money coming back and all related, and some industries will be negative first,” she added.
However, the property sector’s overall footprint accounts for roughly one-quarter of China’s economy as its influence is felt in various industries including finance and building materials, and as a result, a stressed real estate sector affects both Chinese economy, financial system, and local government fiscal profiles.
“Actually, in the past 20 years or even 30 years, the government always tried to make a balance between an appropriate property price to prevent it from becoming too hot,” said Wei.
Now, China has lifted many of the previously imposed restrictions on homebuyers and meanwhile has implemented measures to save the industry.
Those include guaranteeing the completion of pre-sale residential properties to prevent mortgage defaults, reducing mortgage rates and down-payment ratios, and extending loan repayment terms for corporations.
The government has also allocated funds for affordable housing, urban village renovation, and emergency public facilities, which aim to provide housing for lower-income households.
In a press conference by the State Council Information Office on January 25, Xiao Yuanqi, deputy director of China’s National Financial Regulatory Administration, said the country’s financial institutions had “an inescapable responsibility to provide strong support” to the property sector.
SCIO briefing on financial sector contributing to high-quality development of economy and society
These policies have been regarded as effective when implemented in specific cities.
On February 7th, the Housing and Construction Bureau of Shenzhen announced to cancel the requirement for homebuyers to meet a specific duration of residence in the city, as well as the duration requirement for personal income tax and social insurance.
“After the policy was relaxed, most of my colleagues started to have things to do and take customers to look around the houses, which is much better than last year when everyone just stayed in the office doing nothing,” said He Jun, 32, a property agent in Shenzhen.
However, the current market remains relatively sluggish. For first-hand houses in the price range of three to five million yuan, the popular developments are those with lower prices and significant discounts, like there is a popular project in Longgang District that sells at 25,000 yuan per square meter, said He.
Apart from these, developers without any distinctive discounts are struggling to attract buyers, he added.
While experts remain hopeful about the recovery of the real estate market.
“It takes time to recover, as you can already see how much money we lost during the three years of COVID, but we are trying to get back on track,” said Wei.