China's property market woes are not over yet
Chinese real estate stocks have soared over the past month, a dramatic change after almost three years of declines. The shift follows a barrage of announcements from Beijing signaling the end of a long campaign to bring the property sector to heel.
The latest measures have given an immediate boost to many developers, as a select group has received an infusion of 1 trillion yuan ($141.5 billion) in new credit lines from state banks. This compares with a string of previous announcements of property market support over the course of the past year that made little real impact.
But the woes of the Chinese property sector, like those of the nation's economy more broadly, are likely far from over. The fate of the real estate market, as with that of the country's 1.4 billion people, will depend on how and when Beijing ends its zero-COVID policy.
The recently announced measures signal a U-turn of the policy stance adopted by Beijing in 2016. Beginning at that time, the authorities unveiled a series of measures to try to stem rapidly rising home prices.
This culminated in an August 2020 regulation known as the "three red lines," which restricted developers' access to new credit. But the move to curb property companies' overborrowing proved too severe given their longtime reliance on a business model of high leverage for high growth.
A run of high-profile bond defaults that started in mid-2021 tipped China's entire real estate sector into severe financial distress. By last July, more than 30 large developers had defaulted on some $1 trillion in bonds.
The broken real estate sector soon showed its importance to economic growth and social stability.
Over the first 10 months of 2022, land purchases fell around 50% nationally while sales of new homes dropped about 25% and construction completions sank 40%. Given that real estate and related sectors together account for about 30% of China's gross domestic product, the property market crash is expected to drag down this year's overall growth rate by 2-3 percentage points.
Beyond the economic impact, a campaign by homebuyers to halt mortgage payments for units in buildings where developers had stopped construction due to a lack of funds appeared to pose a real threat to social stability as well as to banks' loan books.
This finally prompted the authorities to try to fine-tune their policy squeeze, with an eye toward ensuring the completion of unfinished projects to quench homebuyers' anger while leaving the fate of the developers themselves to the market.
However, this project-based bailout approach was deeply flawed. When developers realized that they would not be helped to escape future bankruptcy this way, they had no incentive to painstakingly manage ongoing projects to ensure timely completion.
As a consequence, the property market continued to deteriorate, with the mortgage boycott movement regaining steam.
The new measures from the People's Bank of China and the China Banking Regulatory Commission take a different tack. In addition to pushing state banks to extend new credit to cash-strapped private developers, the agencies directed lenders to work with borrowers to restructure existing loans. Meanwhile, the China Securities Regulatory Commission reopened a long-closed door for real estate companies to raise funds through share sales.
The new credit stream has allowed many private developers to breathe a sigh of relief as their problem in essence has been an issue of liquidity rather than solvency. Now they have the right incentives to complete presold projects, which will appease existing customers and give some reassurance to potential new homebuyers.
But doubts about the completion of new projects are just one of the concerns keeping homebuyers on the market's sidelines. The country's slowing economy and diminished personal incomes due to the COVID-induced downturn have also been weighing heavily on demand.
China's strict zero-COVID policy is the main culprit behind sluggish real estate demand. Strict quarantine rules and movement restrictions have seriously inhibited economic activity and reduced incomes, in turn making consumers deeply pessimistic about the future and reluctant to commit to home purchases.
The revival of real estate demand will only follow the lifting of COVID restrictions, which at last appears to be on the horizon. But given the authorities' preference for gradualism, it will take a long time for all COVID restrictions to be lifted and the economy put back on the right track.
If everything goes smoothly, real estate demand could bottom out in the second half of 2023. But it is very unlikely the property sector will again match the record reached in 2021 of 1.8 trillion sq. meters in real estate sold.
Moreover, the authorities might need to worry about other legacy problems from the collapse of the real estate bubble.
For one, the supply of new homes has diminished significantly over the past couple years, which could reignite upward price pressure if demand returns. Secondly, lenders still need to worry that many of their loans to private developers could turn bad as the old high growth model will not be back.
China's property tycoons are unlikely to resume their places at the top of the country's wealth ranks. A fresh chapter has begun for the country's real estate sector and this will bring a new set of winners to the fore.