Former Chinese Ministry of Finance Minister Lou Jiwei stated that the slump in the Chinese property market is expected to continue, and the transformation of the real estate sector will need to wait for another five years.
Attending the 16th Caixin Summit on Friday, November 14th, Lou pointed out that before the burst of the real estate bubble in 2021, China had been operating under a development model in the real estate sector for over two decades. This model featured high turnover, high leverage, and high debt, known as the “triple highs,” leading to soaring property prices, land prices, debt levels, and the issue of local government’s excessive reliance on land revenues.
Lou Jiwei emphasized that a significant flaw in the past Chinese real estate system was the presale mechanism. He stated that while mainland China borrowed the name of this system from Hong Kong, it failed to adopt the essence of it effectively.
“In Hong Kong, the presale system involves collecting payments from homebuyers in accordance with the progress of real estate development projects, while in mainland China, payments are collected upfront from the beginning. Moreover, the advance payments collected in Hong Kong must be used solely for the specific project, whereas many mainland real estate developers use these funds for liquidity purposes, diverting them to other projects,” he explained. “This presale mechanism in mainland China has exacerbated real estate risks, necessitating a departure from this conventional model.”
Lou Jiwei mentioned that the transformation of the real estate model over the past four years could be accelerated, but given that the model has been entrenched over the long term, the transition will not be completed quickly, requiring at least another five years.
This transformation includes converting irregular real estate products into net assets, proposing the gradual abolition of the presale system, prohibiting the diversion of advance payments to other real estate projects and transitioning towards immediate sales, and addressing the issue of project halts following the collapse of the bubble to ensure the delivery of presold properties.
According to Lou Jiwei’s assessment, the downturn in the Chinese real estate market is likely to persist for a considerable period. As properties no longer retain their value, diminishing resident expectations may hinder consumption growth, reinforcing deflationary trends.
Beijing University financial professor Michael Pettis concurred on social media that he agrees with the former finance minister’s prediction of a five-year contraction in the Chinese property market.
“Pricing in first-tier cities may bottom out and rebound in the next year or two, but prices in lower-tier cities could continue to decline for many more years,” he added.
According to official data released on Friday by the Communist Party, the real estate market in China is further deteriorating. Based on these figures, Reuters estimated a 0.5% monthly decline in new residential prices in October, marking the most significant drop in a year, with a 2.2% year-on-year decrease.
The downturn in existing home prices, a key indicator of market sentiment, was even more severe, declining by 0.66% month-on-month, the sharpest drop in 13 months.
Economists are generally concerned about the future prospects of the Chinese economy, warning that the recent easing measures in the local property market are losing their effectiveness and the market has yet to reach its lowest point.
Xu Tianchen, senior economist at the Economist Intelligence Unit (EIU), remarked, “The month-on-month decline in existing home prices is nearing a crucial threshold.” He cautioned that if this trend continues, the government may ultimately have to intervene in the housing market.