China’s real estate crisis seems intractable as developers are ceasing construction due to funding shortages. More and more consumers are opting not to purchase presale homes, leading to presales accounting for the lowest proportion of new home sales in 18 years. This, in turn, further complicates developers’ ability to recoup their investments.
Presale homes have been a primary method of home purchasing in China, allowing real estate developers to quickly recover their investments and facilitate new project development. However, with multiple developers defaulting and leaving projects unfinished, homebuyers are beginning to lose trust in presale properties.
Data from China’s National Bureau of Statistics shows a 21% year-on-year decline in new home sales from January to July this year. Amid the overall decline in new home sales, presale home sales have dropped by around 30%, while completed home sales have increased by 20%, reaching the highest level for the same period since 2006.
China’s real estate crisis has led to severe cash shortages among developers, with some halting presale property construction. It is conservatively estimated that developers have sold around 10 million apartments that are not yet completed, leaving frustrated homebuyers unable to move in. This has sparked protests and instances of buyers refusing to pay mortgage loans.
Reported by Nikkei Asia on September 3, if developers increase sales of completed homes, it will take more time to recover their investments. It is estimated that construction costs may rise by 20% to 30% compared to presale homes. Even if sales improve, the ability of developers to recoup necessary funds and improve cash flow amid downward price pressures remains uncertain.
“Funding turnaround will slow down, making it difficult for real estate companies to operate as actively as before,” said Yusuke Miura, a senior researcher at NLI, to Nikkei News.
Moreover, there is no sign of a bottoming out in China’s new home prices. According to China’s National Bureau of Statistics, in July this year, prices in 66 out of 70 major cities declined month-on-month. Over half of the cities have witnessed a continuous decline in property prices for 14 consecutive months.
The unweighted average price decline for the 70 cities was 0.6%. Since June 2023, this negative trend has persisted, making it challenging for real estate developers to obtain project funding.
Since the Chinese regulatory authorities began deleveraging and rectifying the real estate industry in 2021, the sector has been in crisis. Major real estate firms have faced debt crises due to bank credit cuts, with Evergrande, Country Garden, Vanke, Huachen, and Joy City experiencing debt defaults one after another. This has led this pivotal industry in China’s economy into debt crises and sales downturns, significantly dragging down the overall economy.