China’s real estate industry continues to shrink, according to the latest official data from the Chinese Communist Party. In October of this year, housing prices in 70 major and medium-sized cities in China continued to decline. Over the first 10 months of the year, nationwide real estate development investment, sales area of commercial housing, and real estate development prosperity index have all experienced significant declines.
On November 14th, the Chinese National Bureau of Statistics released the data on the price changes of residential properties in 70 major and medium-sized cities in October and provided an overview of the basic situation of the national real estate market over the first 10 months of the year. All categorized statistical data showed a downward trend.
Regarding the selling prices of newly built residential properties in October, in the four first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen, there was a 0.3% month-on-month decrease and a 0.8% year-on-year decrease. In the 31 second-tier cities including Tianjin, there was a 0.4% month-on-month decrease and a 2.0% year-on-year decrease. In the 35 third-tier cities including Tangshan, there was a 0.5% month-on-month decrease and a 3.4% year-on-year decrease.
As for the selling prices of second-hand residential properties, there was a 0.9% month-on-month decrease and a 4.4% year-on-year decrease in first-tier cities; a 0.6% month-on-month decrease and a 5.2% year-on-year decrease in second-tier cities; a 0.7% month-on-month decrease and a 5.7% year-on-year decrease in third-tier cities.
Taiwan’s South China University of International Affairs and Business Professor Sun Guoxiang expressed surprise at the simultaneous decline in housing prices across first, second, and third-tier cities in mainland China. He told Dajiyuan that this phenomenon is “extremely rare” in the history of the real estate market in China, reflecting a shift towards a “pessimistic overall market expectation.”
Furthermore, in the first 10 months of the year, China’s national real estate development investment amount decreased by 14.7% year-on-year, the amount of funds in place decreased by 9.7%; residential construction area decreased by 9.7%, new construction area decreased by 19.3%, completed area decreased by 18.9%; new commercial housing sales area decreased by 7.0%, and sales amount decreased by 9.4%.
Sun Guoxiang noted that these data indicate a comprehensive contraction in the three key indicators of the mainland’s real estate sector, implying that “developers are hesitant to invest and start construction on the supply side, while residents are reluctant to buy houses and incur debts on the demand side.”
Economic scholar David Huang, based in the US, also believes that the demand side of the Chinese real estate market is experiencing “structural contraction,” with continuous price declines and no signs of stabilization. Cash constraints among developers have become a norm, transforming the entire real estate industry from high growth to a drag on the economy.
The real estate development prosperity index for October was 92.43, marking a seventh consecutive month of decline. While the index reached a peak of 93.9 in March of this year, it still remains in the category of “lower prosperity levels” below 95.
Sun Guoxiang observed that this index lingering at a low level suggests the market is hovering at the bottom, and he believes that the downturn in the real estate market may continue for an extended period.
He stated, “Overall, China’s real estate is undergoing a period of deep adjustment and crisis of confidence, characterized by widespread price declines, normalized sales decline, tense funding chain, and shattered market confidence.”
David Huang added, “The current situation in China’s real estate market is not a short-term lull but rather an ongoing adjustment period to deflate bubbles and reduce financialization, which is far from over.”
Bloomberg reported on November 14th that more than $1 billion worth of real estate mortgage loans in China are facing default risks, threatening to bring about a new crisis in the mainland housing market.
Former Chinese Finance Minister Lou Jiwei mentioned at a Caixin conference on the 14th that a major flaw in China’s real estate system is the “pre-sale system.” He believes that the property market’s downturn in China will persist, estimating that the transition of the real estate model will require “at least another 5 years.”
The pre-sale system in real estate refers to developers selling housing to buyers before the construction is completed, using the collected down payments or prepayments to fund the construction of the property.
David Huang commented that while the pre-sale system itself is “quite sound,” it has not been effectively implemented in China.
Sun Guoxiang remarked that the pre-sale system in China shifts risks onto homebuyers, banks, and local governments, leading to a chain reaction of defaults when sales decline. He mentioned, “Developers’ high leverage and high turnover operations lead to the collapse of a high-risk model.”
China’s leading real estate company, Evergrande Group, experienced a debt crisis and default event in 2021, with debts reaching about 2.43 trillion yuan ($300 billion USD) in 2022, resulting in the group’s bankruptcy and liquidation, and leaving behind millions of “unfinished properties,” leaving many buyers in distress.
Sun Guoxiang believes that the potential default of over $1 billion in real estate mortgage loans in China mentioned by Bloomberg might just be the tip of the iceberg.
David Huang stated that the current overlap of China’s land policies, local policies, and financial risks is a key reason for the frequent collapses of real estate enterprises.
Sun Guoxiang pointed out, “Local governments in China are heavily reliant on real estate, which poses systemic risks. Approximately 25% to 30% of China’s GDP is related to real estate from upstream to downstream, with local finances dependent on land revenue accounting for 40% to 70%, and 60% to 70% of residents’ assets being in real estate. Any downward trend in this structural system would result in a societal impact.”
Regarding Lou Jiwei’s statement that China’s real estate market needs another 5 years to rebound, Sun Guoxiang believes that 5 years is “optimistic,” suggesting that “10 years may align more with international experiences.”
He added, “Based on what we’ve seen internationally, for instance, after the bursting of the bubble in Japan, it took 10 to 20 years for adjustment. China’s adjustment period may be even longer.”
David Huang contended that Lou Jiwei’s viewpoint is merely that of a spokesperson for the ruling class, emphasizing that the crux of the issue in China’s real estate isn’t about “old models versus new models” but rather the policies and governance of the Chinese Communist Party.
He highlighted that high taxes in China, where heavy taxes make up a significant portion of housing prices, are a fatal flaw. “Excessive taxation is a fatal flaw, without resolving this issue, no policy will work.”
Moreover, he mentioned that the CCP’s “welfare and security for the people are too low,” which negatively impacts the economy. He also criticized the CCP for being “an outsider managing the real estate sector,” stating that effective market management is unattainable.
He concluded, “Whether it’s hitting bottom in 5 years is simply absurd. The key lies in addressing these three fundamental issues in the real estate market. Furthermore, we notice that apart from the Yangtze River Delta, the Pearl River Delta, and the Bohai Rim region, there is no investment value in other real estate markets.”