The real estate crisis in China is not over yet: what is happening?

SEOUL – Chinese home buyers’ strong belief that real estate is a safe investment has made the country’s real estate sector the backbone of its economy.

But over the past two years, as businesses crumble under heavy debt and new home sales decline, Chinese consumers have demonstrated an equally unwavering belief: real estate has become a losing investment.

This apparent loss of confidence in property, the main store of wealth for many Chinese families, is a growing problem for Chinese policymakers, who are making every effort to revive the industry – with little effect. The problems came to a head on January 29 when a Hong Kong court ordered China Evergrande to cease operations and liquidate the company, which has more than $300 billion in debt.

Evergrande limped along for two years after defaulting on payments due to investors. Short of cash to pay creditors, he tried to convince them that his apartments were still a good investment. The market will surely recover, as it did during the last economic recession.

But this economic recession, the longest on record, is not only longer, it is accelerating.

Home sales in China fell 6.5 percent in 2023. Sales in December fell 17.1 percent from a year earlier, according to Chinese investment bank Dongxing Securities. Real estate development declined by 9.6 percent last year.

“The market has not bottomed out yet,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis. “There is still a long way to go.”

Japanese financial services firm Nomura Securities estimates that there are 20 million pre-sold housing units waiting to be completed, which would require $450 billion.

Now Chinese financial regulators are urging banks to extend more loans to developers.

Xiao Yuanqi, deputy director of China’s National Financial Regulatory Administration, recently said that banks should not immediately cut loans to troubled projects, but should extend the time to repay the loans or provide additional funds. China’s central bank and financial regulator has said it will allow some developers to use bank loans for commercial properties to pay off other loans or bonds.

Since 2021, more than 50 Chinese real estate companies have defaulted on their loan payments, including two major companies: Evergrande and Country Garden.

When China took steps to cool the real estate sector several years ago, it limited home buying by speculators. Buyers were required to make large down payments, which discouraged people from purchasing additional property. Suzhou, a city in eastern China, has lifted most of its restrictions. However, relaxing the rules has not helped the market.

China’s outstanding mortgage loans fell 1.6 percent last year to 2022, a year when businesses and residents in many cities were still dealing with lockdowns due to the Covid-19 pandemic. According to Chinese business magazine Caixin, this represents the first decline in nearly two decades. As of 2021, mortgages were growing at more than 10 percent annually.

An ongoing concern for potential home buyers is the large number of incomplete and already sold apartments.

Nidia Duan, a 19-year-old college student in Guangdong province, said her family offered to buy her a house when she turned 18, but she resisted because of concerns about it.

“I’m still reluctant to buy it,” she said. “I will consider it when the housing market is more stable.”

By: Daisuke Wakabayashi and Claire Fu