China’s property sales set for a plunger than in 2008, S&P says

Most apartments in China are sold before developers finish building them. Pictured here on June 18, 2022, are people selecting apartments at a development in Huai’an, Jiangsu province, near Shanghai.

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BEIJING — China’s property sales are set to plunge this year by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings.

National property sales will likely drop by about 30% this year — nearly two times worse than their prior forecast, the ratings agency said, citing a growing number of Chinese homebuyers suspending their mortgage payments.

Such a drop would be worse than in 2008 when sales fell by roughly 20%, Esther Liu, director at S&P Global Ratings, said in a phone interview Wednesday.

Since late June, unofficial tallies show a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects — until developers finish construction on the apartments.

Most homes in China are sold before completion, generating an important source of cash flow for developers. The businesses have struggled to obtain financing in the last two years as Beijing cracked down on their high reliance on debt for growth.

Now, the mortgage strike is damaging market confidence, delaying a recovery of China’s real estate sector to next year rather than this year, Liu said.

If there is a sharp decline in home prices, this could threaten financial stability.

As property sales drop, more developers will likely fall into financial distress, she said, warning the drag could even spread to healthier developers “if the situation is not contained.”

There’s also the potential for social unrest if homebuyers don’t get the apartments they paid for, Liu said.

Limited spillover outside of real estate

Although the number of mortgage strikes has increased rapidly within a few weeks, analysts generally don’t expect a systemic financial crisis.

In a separate note Tuesday, S&P estimated the suspended mortgage payments could affect 974 billion yuan ($144.04 billion) of such loans — 2.5% of Chinese mortgage loans, or 0.5% of total loans.

“If there is a sharp decline in home prices, this could threaten financial stability,” the report said. “The government views this as important enough to quickly roll out relief funds to address eroding confidence.”

Chinese policymakers have encouraged banks to support developers and emphasized the need to finish apartment construction. Authorities have generally expressed more support for real estate since mid-March, while maintaining the mantra of “houses are for living in, not speculation.”

“What worries us is the scale of those support is not big enough to save the situation, [which] now turns to [a] direction worse,” Liu said.

However, critically, Liu said her team doesn’t expect a sharp decline in house prices due to local government policy to support prices. Their projection is for a 6% to 7% decline in home prices this year, followed by stabilization.

And while S&P economists estimate about a quarter of China’s GDP is affected directly and indirectly by real estate, only part of that 25% is at a risk level, Liu said, noting the firm doesn’t have specific numbers on the impact of the mortgage strikes on GDP.

A bigger problem to unravel

China’s real estate sector has been intertwined with local governments and land use policy, making the industry’s problems difficult to resolve quickly.

In analysis published Tuesday, Xu Gao, director of the China Chief Economist Forum, pointed out the amount of residential floorspace completed annually has actually not grown on average since 2005, while the amount of land area sold has declined on average during that time.

The contraction stands in contrast with rapid growth in both land area sold and completed residences before 2005, when the new bidding process for land fully took effect, he said. The new bidding process tightened the supply of land and real estate, pushing up housing prices more than speculation did, Xu said.

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Investors should only consider the best developers among high-yield China property debt, Goldman Sachs said in a report Tuesday. “We see relative value in their lower dollar priced longer duration bonds.”

But overall it’s a story of uncertainty in one of China’s largest sectors.

“To us, the continued stresses in the property sector coupled with the uncertainties related to COVID measures suggest a murkier outlook for China,” wrote credit strategist Kenneth Ho.

A possible scenario he laid out is one in which credit worries remain elevated but without real systemic concerns, creating a negative overhang for investor sentiment on high-yield credit markets.

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