Struggling property sector weighs on China’s property-driven growth model

China’s real estate market is undergoing a severe and drastic reshuffling process, with the deflated real estate bubble spilling over into other sectors.

Home sales are expected to fall 24.5% in 2022, according to a Reuters survey of analysts and economists in late August, a far bigger drop than the 10% drop predicted in the May poll.

The stakes are high, as figures from the US National Bureau of Economic Research indicate that real estate, including related activities, contributes up to 29% to China’s GDP and has been a key driver of its growth. sustained economy.

Moreover, about 70% of household wealth in China is stored in real estate.

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Triggered by deleveraging

China’s property sector began to face headwinds from the summer of 2020 after regulators stepped in to reduce excessive leverage, causing some developers to default on debt.

Developers have since struggled to complete projects, leading buyers to threaten to stop paying.

The struggling sector is weighing on the outlook for China’s economy, which narrowly escaped a contraction in the second quarter of 2022 due to crippling COVID-19 lockdowns.

Moody’s analyst Daniel Zhou said in a research note, “Uncertainty over China’s growth outlook and concerns over project incompleteness will largely drive weak demand from homebuyers in the United States. over the next 6 to 12 months.

“Disruptions to business activity and sales execution caused by COVID-19 will also weaken consumer confidence, while buyers’ anticipation of lower house prices will delay property purchases. .”

Mortgage strikes

A popular way to buy property in China is “presale”, where buyers pay for the property before it is built.

According to Julian Evans-Pritchard, China economist at Capital Economics, pre-sales account for 70-80% of new home sales in China.

Developers often buy land, get loans to start construction, and then get money from pre-sale home buyers.

But many developers divert that money to fund new projects, instead of completing existing ones.

Since the start of 2022, thousands of home buyers in China have refused to pay their mortgages in protest against unfinished residential projects.

According to crowdsourced estimates cited by The New York Times, these homebuyers who had been paying monthly mortgages at rates of 5% and above have stopped or are threatening to stop paying their mortgages in more than 300 unfinished housing projects in about 90 cities across China.

Homebuyers who have gone on a mortgage strike believe their money has been misused by property developers.

According to ANZ Financial Services, these mortgage strikes could impact 1.5 trillion yuan or $222 billion in mortgages tied to unfinished apartments, which is nearly 4% of outstanding mortgages.

Surveys published by various companies have indicated that mortgages at risk of default could total between US$150 billion and US$370 billion.

Evergrande’s $300 billion debt

The snowball effect of China’s property crisis dates back to the fall in 2021 of China’s second-largest property developer by total sales, the Evergrande Group.

The company had taken money in advance from more than 1.5 million home buyers and hadn’t paid many suppliers.

Evergrande told creditors in January 2022 that it would unveil a preliminary plan by the end of July to restructure its $300 billion in liabilities, including $20 billion in offshore bonds.

However, the developer missed that deadline and instead said it had only made “positive progress” towards a proposal.

According to nikkei.com, Evergrande disposed of assets, including real estate and its stakes in companies, to pay off some of its creditors.

The Evergrande chairman has also put his personal possessions up for sale, including private jets.

Despite these efforts, the developer’s Hong Kong headquarters was seized by a lender last week after the company defaulted on a loan and twice failed to sell the building.

A crisis of confidence

Last month, Country Garden Holdings, which was China’s top property developer in 2021, reported a 96% drop in first-half profits after selling a third fewer homes than a year ago.

Country Garden said the market struggled with weakening expectations, weak demand and falling house prices.

He added: “All of this is putting increasing pressure on all players in the real estate market, which has rapidly slipped into a serious depression.

Country Garden said the resurgence of COVID-19 in cities across China has also slowed construction activity and weighed on its performance.

The Guangdong-based company made a small profit equivalent to $89 million in the first six months of 2022, compared to $2.2 billion in the same period of 2021.

Although the company has long been considered one of China’s strongest property developers, it has struggled to weather a crisis of confidence that has caused buyers to shy away from the Chinese property market.

Overflow into other sectors

China’s deflating housing bubble has also spread to other sectors, including the country’s banks and asset managers who specialize in managing distressed loan and distressed debt portfolios.

China Cinda Asset Management Co., the country’s largest bad debt manager, recently reported a 33% drop in first-half profits to $653 million.

Cinda said the Chinese government was “facing an increasingly complex, bleak and uncertain development environment.”

The company’s counterpart, China Huarong Asset Management Co., reported a net loss of $2.7 billion for the first half and described the country’s economic conditions as “extremely complex and challenging”.

Huarong’s international financial arm predicted that in the second half of the year, China will face many challenges, including pressure on investment, consumer spending and export trade.

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