China’s real estate market continues to decline, with a shortage leading to a surge of over 12% in foreclosed properties. In addition, both the demand for new homes and existing homes in July remained sluggish, with prices continuing to fall. Faced with the sluggish real estate market, the Chinese Communist Party (CCP) rejected the International Monetary Fund (IMF)’s call to deploy approximately $1 trillion in fiscal resources at once to rescue the property market. Chinese economic and social scholar He Qinglian analyzed that the CCP is facing financial difficulties, and the funds needed to rescue the property market are enormous. The CCP’s decision not to rescue a doomed bubble is inevitable.
Data released recently by property market research firm Kerui shows that in the first half of 2024, the number of residential foreclosed properties in China exceeded 202,000, with an annual growth rate exceeding 12%. Cities such as Zhengzhou, Xiamen, Fuzhou, and Suzhou all recorded an increase of over 40% in the scale of foreclosed properties.
The significant increase in foreclosed properties indicates a further rise in the number of households facing cut-offs. Liu Dongyue, a staff member at a foreclosed property intermediary in Guangzhou, mentioned that due to the poor economic environment, foreclosed properties in Guangzhou and Shenzhen have noticeably increased this year. The groups mainly facing cut-offs consist of three types: wage earners, small business owners, and speculators. However, the first two categories account for about 80% of the cut-off proportion.
Liu Dongyue pointed out that most wage earners bought houses three to five years ago at high prices, depleting their family savings spanning three generations. Additionally, most families bought houses in the suburbs for residential purposes, with prices having dropped by at least 40% to 50% now. On the other hand, small business owners purchased properties primarily for business loans, using the real estate as collateral to obtain bank loans for their businesses. However, with the economic downturn, their businesses are no longer viable. Most speculators also entered the market three to five years ago at peak prices, aiming to profit from rising property prices in the future.
Behind each foreclosed property lies a heart-wrenching story, as recounted by Liu Dongyue, who encountered a person on the verge of foreclosure ending up in the ICU because their family could no longer afford the mortgage. Another family faced business failure, losing their home through foreclosure and still owing money to the bank, resulting in them losing credibility and leaving elderly family members and young children homeless.
Kerui’s data shows that the transaction rate of foreclosed properties has been declining annually. In the first half of 2024, the average transaction rate of foreclosed properties was 17%, a 7-percentage-point decrease from the same period last year. The average discount ratio of foreclosed properties sold in the first half of 2024 reached 33%, an increase of 3 percentage points from last year. Against the backdrop of shrinking real estate transactions, the discounts on foreclosed properties have intensified further.
Zhang Yuxiang, a partner at a foreclosed property intermediary company in Nanjing, Jiangsu Province, noted that in the past two years, the number of foreclosed properties in Jiangsu has increased significantly. Additionally, the transaction prices are generally lower than existing property prices, with many properties often going unsold. Zhang stated that the unsold rate reached 70% to 80%. Typically, properties are auctioned starting at a 30% discount, and after failing to sell, subsequent rounds involve an 80% discount from the starting price, essentially reducing the property value by half or more. Even if sold, the banks often fail to recover their initial investment, leading them to persuade buyers against foreclosure as much as possible.
Having witnessed numerous unfortunate stories behind foreclosed properties, Zhang Yuxiang cautioned that without sufficient funds, it is not advisable to buy a house and renting may be a safer option, particularly in such an unstable economic climate where retaining cash is crucial.
Furthermore, statistics from Kerui indicate that in the first half of 2024, Shanghai, one of the benchmarks in the real estate market, had an average foreclosure transaction rate of 46%, significantly higher than the national average. In terms of total price range, the transaction rate for properties priced between 3 million yuan (about $420,000) and 5 million yuan (about $700,000) was the highest at 59%, with a corresponding discount rate of 28%.
Liu Dongyue commented that cities with high foreclosure transaction rates are mostly first-tier cities, particularly those in prime locations with luxurious properties possessing scarce qualities and serving as collateral for loans. Suburban properties, on the other hand, often struggle to find buyers.
Data released by the National Bureau of Statistics of the CCP on August 15th showed that in July, the selling prices of new commercial residential buildings in first-tier cities decreased by 0.5% month-on-month, with declines of 0.5% in Beijing, 0.8% in Guangzhou, and 0.9% in Shenzhen, and a 0.2% increase in Shanghai. The selling prices of new commercial residential buildings in second-tier cities decreased by 0.6%, narrowing by 0.1 percentage point compared to the previous month. In third-tier cities, the selling prices of new commercial residential buildings decreased by 0.7%, expanding by 0.1 percentage point compared to the previous month.
Moreover, the selling prices of existing homes in first-tier cities saw a year-on-year drop of 4.2%, with decreases of 3.3% in Beijing, 9.9% in Guangzhou, and 8.0% in Shenzhen, and an increase of 4.4% in Shanghai. The selling prices of existing homes in second and third-tier cities decreased by 4.8% and 5.8%, respectively, with declines expanding by 0.3 and 0.4 percentage points compared to the previous month.
On the other hand, the secondary market of the real estate market continues to decline as well. The China Real Estate Index System’s Price Index for One Hundred Cities showed that the average price of existing homes in one hundred cities continued to decline in July, marking seventeen consecutive months of decline.
The Zhege Information Research Center’s “July 2024 One Hundred Cities Housing Price Index Report” revealed that in July, the average price of existing homes in one hundred cities was 14,329 yuan (approximately $2,000) per square meter, a 7.05% decrease from the same period last year. The report also showed that the prices in key cities continued to fall more than rise in July, with all levels of cities maintaining an overall downward trend, with declines expanding compared to the previous quarter.
In response to the continuous decline in China’s real estate market, on August 2nd, the IMF released an annual review report on China’s economy, calling on Beijing to use a one-time fiscal resource of approximately $1 trillion to complete and deliver pre-sold properties or compensate homebuyers. However, the CCP authorities rejected the IMF’s recommendation, citing the need to avoid creating an expectation of government-backed relief among the public.
In response to this, Chinese economic and social scholar He Qinglian argued that the main reason why the CCP refused the IMF recommendation is the enormous funding required to rescue the property market. The CCP is currently facing financial difficulties, with a national fiscal deficit of 4.06 trillion yuan based on a 3% deficit rate, and limited funds needed to maintain the core functions of local governments. Additionally, after years of controlling the real estate sector, the CCP has realized that continuing to inject funds into the property market would be a temporary solution at best, hence their decision to stop rescuing an inevitable bursting bubble.