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China's real estate crisis has intensified, with a worsening economic impact, massive layoffs, and the collapse of multi billion-dollar companies. Economists predict further deterioration, anticipating a prolonged downturn that may last for years.
In 2023, China witnessed a 6% decline in sales of newly built homes, reaching a level not seen since 2016, as reported by China's statistics bureau. The four wealthiest cities—Beijing, Shanghai, Guangzhou, and Shenzhen—experienced a notable drop of 11% to 14% in secondhand home prices in December compared to the previous year.
Developers are initiating fewer projects, homeowners are repaying mortgages early, and borrowing has decreased. Property companies, once thriving, are entangled in prolonged negotiations with foreign investors due to defaults on approximately USD 125 billion of overseas bonds between 2020 and late 2023. Chinese and local governments, desperate to attract home buyers, have resorted to unusual marketing strategies.
Some peculiar marketing strategies include a Tianjin-based property company running an advertisement offering a "Buy a house, get a wife for free" promotion, leveraging wordplay. It was using the same Chinese characters as the phrase “buy a house, and give it to your wife”—but presented in a sentence structure typically used to offer freebies for home buyers. Another residential compound in Zhejiang province promised homebuyers a 10-gram gold bar. Such marketing tactics indicate the desperation to stimulate a sluggish real estate market.
Former head of the statistics department at the People's Bank of China, Sheng Songcheng, predicts that the housing downturn will persist for another two years, with new-home sales expected to decline more than 5% in both 2024 and 2025. Wall Street economists echo concerns about the prolonged real estate slump, drawing parallels with Japan's extended struggle to recover from a crash in real estate and stock prices.
Raymond Yeung, Chief China Economist at ANZ, highlights a fundamental shift in how Chinese people perceive the property sector, noting that housing is no longer viewed as a secure investment. China's real estate sector, once a significant contributor to GDP, has seen a decline, prompting calls for more substantial measures to support the sector. While economists draw comparisons to Japan's prolonged real estate slump, China's central bank could play a crucial role in alleviating the situation, provided it adopts aggressive policies.
Li-gang Liu, Head of Asia Pacific Economic Analysis at Citi Global Wealth Investments, suggests that the central bank has policy room to make a significant impact and calls for a decisive intervention. Liu Yuan, Head of Property Research at Centaline, emphasises the necessity of government assistance, stating that new home prices may need to drop another 50% before reaching a bottom without intervention.
The real estate downturn in China has already led to over 50 developer defaults and a backlog of millions of unfinished homes. Local governments, facing financial strain, have incurred hidden debt estimated between USD 400 billion and USD 800 billion. To address potential defaults, the central government has implemented debt-swap programs to assist some local governments in refinancing. Despite some optimistic projections, with expectations of buyers returning to the new-home market gradually, many experts anticipate continued challenges and further pain.
As China grapples with the deepening real estate crisis, the impact on the broader economy, companies, and local governments underscores the urgency for effective and comprehensive interventions to stabilise the market and mitigate long-term repercussions.
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