China’s Property Market Necessitates Heightened Government Intervention Amid Deepening Crisis

Date Issued – 21st November 2023

Author – Emmanuel Baiden – Senior Research Analyst

China's indispensable property sector, integral to the nation's economic landscape, is teetering on the edge, prompting analysts to emphasise the urgent need for increased government support.

Dual Downturn

Existing home prices witnessed the most significant decline since 2014 in October, coupled with the unprecedented fall of outstanding property loans, signalling a dual impact on both demand and supply sides, as noted by Larry Hu, Chief Economist at Macquarie.

Unaddressed Risks

While previous policies concentrated on stimulating demand, the critical issue of credit risk linked to developers remains unaddressed, according to a Macquarie report. The absence of a lender of last resort raises concerns about a potential confidence crisis, where falling sales and escalating default risks mutually reinforce each other.

Developer Predicament

Some major developers are already witnessing a rapid rise in credit risks. Beijing's efforts to curb real estate developers' heavy reliance on debt and control soaring home prices have been ongoing. This has made it more difficult for many young Chinese professionals to buy an apartment in the city.

GDP Impact

UBS analysts estimate that real estate and related sectors constitute approximately 22% of China's GDP, a reduction from recent years. Despite measures implemented since November 2022 to enhance developers' financing access and reduce mortgage rates, challenges persist.

?Default Dilemma and Market Fallout

Country Garden, a real estate giant, defaulted on a U.S. dollar bond last month, underscoring the sector's struggles. Nomura analysts estimate that about 20 million units across China have been sold but remain incomplete.

The inability to finish construction on pre-sold properties has led to disruptions, with homebuyers halting mortgage payments on purchased yet unfinished homes.

October Setback

In October, existing home prices in 70 major cities dropped by 0.6%, surpassing September's 0.5% decline. Larger cities, anticipated to have sustained demand due to job availability, reported leading declines, prompting concerns about the sector's bottoming-out.

Regulatory Response

A meeting between the People's Bank of China and other financial regulators signalled support for lending to real estate developers operating normally. Emphasis was also placed on affordable housing development.

The report underscores the need for ongoing support to prevent risks from escalating and calls for a more accommodative monetary environment amid fragile growth.

Market Response

Shares of major property companies, including a 5.9% rise in Sunac's trading in Hong Kong, demonstrated a positive response on Monday. However, the market's optimism is cautioned, as analysts believe that China's property sector has yet to reach its base, necessitating a subtle approach in navigating the ongoing crisis.

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[Disclaimer: This newsletter provides financial insights for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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