At the 2024 Greater Bay Area Chief Economist Forum on July 29, 2024, Nomura Securities’ Chief Economist for China, Lu Ting, stated that the extent of China’s economic recovery fell short of expectations, and the real estate industry is simultaneously facing three “downward spirals,” making it difficult for the real estate sector to recover on its own.
According to data from China’s National Bureau of Statistics, in the first half of 2024, the sales area and sales volume of newly built commercial housing in China were approximately 4.79 billion square meters and 4.71 trillion yuan (RMB), respectively, representing a year-on-year decrease of 19.0% and 25.0%. The newly started construction area of houses was about 3.80 billion square meters, down by 23.7% year-on-year. The China Index Research Institute reported that in the first half of 2024, the top 100 real estate enterprises achieved a sales turnover of approximately 1.85 trillion yuan, a 39.5% decrease compared to the previous period.
Lu Ting addressed the current issues in China’s economy and real estate sector at the Chief Economist Forum.
Lu Ting stated on July 29, as reported by Caixin, “These data indicate that the current real estate crisis is very different from previous ones, as the industry is simultaneously facing three ‘downward spirals.'”
The first “downward spiral” is occurring between housing prices and real estate sales. Over the past three years, housing prices in many Chinese cities have been continuously declining, causing potential buyers to refrain from purchasing during downturns, triggering yet another round of price drops.
The second “downward spiral” manifests in the issues between “unfinished housing projects,” completed projects, and new housing sales. While the problem of “unfinished housing projects” in first-tier cities was not severe, quality issues in new houses have now started affecting the enthusiasm of residents in these cities to purchase new homes.
The third “downward spiral” results from the drop in new housing sales, with developers lacking funds to acquire land, leading to a decrease in local government land revenue, ultimately affecting the local real estate market.
Lu Ting pointed out that prior to this current downward cycle, the real estate sector accounted for about a quarter of China’s GDP, with its peak contribution to national fiscal revenue reaching 38%. However, since 2023, the real estate sector has been persistently sluggish, with various real estate indicators still declining significantly by 10% to 20%, making it challenging for the industry to recover automatically.
Lu Ting pointed out that the Chinese economy is currently facing a decline in local tax revenue, with more local governments raising funds to invest in various enterprises related to new energy. However, areas such as solar energy and photovoltaics have already shown negative growth. In the first half of the year, performance of A-shares was poor, subsequently affecting primary market financing. Meanwhile, the downward trends in the real estate and stock markets, combined with widespread corporate salary cuts, have impacted the wealth effect and income effect of residents, thus affecting consumption and household investment, leading to a reduced contribution of consumption to China’s economic growth.