Recently, the Chinese Communist Party (CCP) released the latest real estate data, showing a general decrease in housing prices in May. Residential sales in the first five months of the year fell by 30.5%, with developer investments down by 10.1%. Despite the CCP’s introduction of major market rescue policies the previous month, experts question why they have proven ineffective. The lack of three key measures is believed to be the critical issue. The ongoing real estate crisis over the past few years is expected to impact banks, financial markets, and lead to sustained economic collapse.
The National Bureau of Statistics of China reported on Monday (17th) that in May, the prices of new homes in large cities fell by 4.3% year-on-year, exceeding the 3.5% drop in April. The prices of second-hand homes dropped by 7.5%, compared to a 6.8% decline in April.
According to Reuters’ calculations based on data from the statistics bureau, prices of new residential properties in 70 large and medium-sized cities fell by 0.7% monthly in May, the largest drop since October 2014, and by 3.9% annually, the biggest decline since June 2015. Prices of second-hand homes in all 70 cities also decreased compared to the previous month.
Furthermore, total real estate development investment in China in the first five months reached 4.06 trillion yuan, a 10.1% year-on-year decrease. Residential investment saw a 10.6% decline, with on-site funds for real estate development companies dropping by 24.3%.
However, a spokesperson for the National Bureau of Statistics of China, Liu Aihua, stated during a press conference that in mid-May, adjustments were made to optimize real estate policies, leading to some positive changes in the real estate market. The effects of the policies will take some time to fully materialize, and the real estate market is still undergoing adjustments.
Zhang Bo, the director of the 58 Anju Research Institute, told Interface News that although housing prices are still on a downward trend, they are showing signs of nearing a bottom.
However, netizens have raised doubts, questioning, “Even after price drops, the ratio of housing prices to income remains unreasonable.” Some suggest that the “bottom” is still far off, with comparisons made to basements and the saying, “The real bottom is on the 18th floor.” Concerns about the declining birth rate, stagnant wages in coastal cities since 2016, and the continuous increase in average housing prices despite claims of reaching the bottom have also been voiced.
Economist Wu Jialong from Taiwan believes that the issue of the Chinese real estate market is challenging to resolve and may fundamentally remain unsolved. Current official efforts are seen as attempts to mitigate the crisis, but the underlying problems persist. Wu questions the methods to accelerate urban renewal, whether through early demolitions, dealing with unfinished projects, or finding ways for people to purchase completed properties.
Earlier, the People’s Bank of China announced significant pro-real estate policies, including reducing down payment ratios and adjusting mortgage rates, on May 17th. Subsequently, first and second-tier cities like Shanghai, Guangzhou, Shenzhen, Hangzhou, and Xi’an actively responded by optimizing and adjusting real estate policies. However, the immediate results have not been apparent.
American financial scholar David Huang believes that Liu Aihua’s statement is accurate in the sense that reversing market trends through policies takes a considerable amount of time to counter inertia. However, Huang points out that the lack of significant new measures addressing the root causes of past inappropriate policies hampers real progress.
Huang emphasizes the need to reduce taxes, in particular transaction taxes related to property purchases or for new developers, as a crucial measure missing in the current policy framework. He also stresses the importance of enhancing social security to enable lower and middle-income families to monetarily support their housing needs adequately, rather than relying on ineffective measures like purchasing unfinished or government-subsidized housing projects.
He further highlights the necessity of improving the efficiency of managing the entire real estate market to align with its demands appropriately. Without addressing these critical aspects, Huang believes that reversing the current state of the Chinese real estate market remains improbable.
Additionally, the National Bureau of Statistics of China revealed that in the first five months of this year, total sales of new residential properties amounted to 3.57 trillion yuan, a 27.9% year-on-year decrease, with residential sales declining by 30.5%. The sales area of new residential properties saw a 20.3% annual decline, with the sales area for residential properties dropping by 23.6%. The newly started construction area for housing decreased by 24.2%, with the area for new residential construction falling by 25%.
Due to the disheartening figures, recent transactions data for second-hand homes in first and second-tier cities in China has seemingly disappeared. Financial self-media outlet “Cherry Big House” reported that at least 15 cities including Beijing, Hangzhou, Hefei, Wuhan, and Nanjing have closed off the display of past transaction prices, leaving potential homebuyers without accessible historical data.
David Huang warns that the reported significant drops in property prices and transaction volumes are likely to lead to an increase in individuals mortgaging their properties, resulting in enlarged risk exposures for banks. Huang points out instances where defaults may lead to banks refusing properties offered for foreclosure, opting instead to negotiate alternative repayment plans to navigate the current constrained market conditions.
As reports surface about individuals defaulting on mortgage payments for extended periods, some have shared experiences where banks show flexibility, relieving some of the financial burden temporarily. Discussions online speculate that such actions are part of a broader strategy aimed at reducing inventory challenges. However, the uncertainty and challenges facing the real estate market have raised concerns and fears among the public.
Sun Guoxiang, an associate professor specializing in state-owned enterprises at Nanhua University in Taiwan, highlights three key aspects of financial risks within the banking system due to the current real estate crisis. He points out that the rise in non-performing loans stemming from property market declines can weaken banks’ financial strength, leading to a subsequent impact on their lending capabilities.
Additionally, Sun emphasizes the potential liquidity crises banks may face if numerous property owners default on mortgages, potentially resulting in a financial system instability leading to elements of a bank run.
Moreover, the declining asset values of real estate properties used as collateral can affect the balance sheets of banks, potentially compromising their capital adequacy. Sun’s insights shed light on the extensive repercussions of the real estate crisis, affecting not only banking institutions but also the broader economy, including a range of industries interconnected with the real estate sector.
In conclusion, the prolonged real estate crisis could initiate a cascading effect impacting various sectors of the economy, dampening consumer and investor confidence, leading to increased unemployment rates, declining corporate profits, and a broader economic downturn. The critical role of real estate as collateral in banking operations suggests that any deterioration in its value could exacerbate systemic risks within the financial system.
The collective viewpoints outlined by various experts and scholars underscore the need for comprehensive measures addressing the root causes of the real estate market challenges in China to avert a sustained economic collapse.