China’s aid to the real estate sector – a linchpin of its economy – is unconvincing

A raft of new support measures will bring much-needed relief to China’s cash-strapped property developers, but a full sector recovery is being hampered by increasingly elusive buyers, say bankers, developers and analysts.

From a sweeping purge a few years ago to a spate of financing moves today, China’s shifting approach to real estate, a key pillar of the economy, reflects just how dire the situation has gotten.

Burdened by protracted Covid-19 restrictions, falling property prices and rising unemployment in the world’s second largest economy, many potential buyers are postponing their plans, posing challenges for developers and policymakers.

“These policies will have little lasting effect and property prices will not rise significantly,” said Jack Yang, an engineer in Beijing.

Yang said he has put plans to sell his home and buy a new one on hold due to Covid restrictions, pay cuts and concerns he could lose his job.

Chinese regulators last week outlined 16 supportive measures aimed primarily at boosting liquidity for developers in the sector’s biggest bailout since it was hit by a debt crisis last year.

Markets welcomed the measures, which included loan repayment extensions and easier access to new finance, but bankers and analysts say they only address the housing market’s supply problems.

Demand for real estate, a sector that accounts for about a quarter of China’s economy, took a big hit last year as many developers lurched from crisis to crisis, halting housing construction as they ran out of money.

The economic fallout from Covid lockdowns in many cities also helped buyers like Yang put off their plans to borrow to buy new homes.

Home sales, as measured by square foot, fell in October for the 15th straight month, while new home prices fell the most in more than seven years.

John Lam, head of real estate research for China and Hong Kong at UBS, said the government’s move to support liquidity “breaks the negative cycle, so to speak”, adding that it “should be positive in terms of demand recovery”.

However, rating agency Fitch said last Tuesday it was standing by its forecast of a “broadly flat trend” in new home sales in 2023.

Housing demand “is dependent on a recovery in homebuyer sentiment and job prospects, which we believe is dependent on a sustained easing of pandemic-related controls in China,” it said.

China eased some Covid rules last week, but analysts say the zero-Covid strategy will continue to weigh on economic activity.

While Beijing has cut mortgage costs and eased some restrictions this year to boost new home purchases, analysts say authorities’ focus mostly on affordable housing and President Xi Jinping’s push on “shared prosperity” are likely to dampen demand .

The drop in home prices is a major concern for homebuyers in China, with a large proportion of them buying new homes as an investment option, with yields historically reaching 30 to 50 percent in some cities.

Despite recent liquidity-boosting measures, some bankers say developers remain exposed to credit risk amid the uncertain outlook.

“The measures will improve the environment for real estate financing, meaning banks have eased the vicious circle and death spiral between real estate risk and financial risk,” said an official at a mid-sized commercial bank. “But it’s too early to say the real estate credit risk warning has been lifted,” the banker said.

According to UBS, Chinese banks have invested around 88 trillion yuan in the real estate sector. She estimates that the downturn in the real estate sector will cost the banking system as much as 1.4-1.5 trillion yuan in the next few years. China’s aid to the real estate sector – a linchpin of its economy – is unconvincing

Fry Electronics Team

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