China’s property market, once a pillar of growth, has slowed sharply in the past year as a result of a government clampdown on excessive borrowing by developers, and a COVID-19-induced economic slump. Sales of floor space plunged by 18.5% year-on-year in January, while average new home prices fell by 0.3% month-on-month, the first decline since May 20151.
The downturn has been exacerbated by the strict zero-COVID policy that China adopted until recently, which imposed lockdowns and travel restrictions across the country. Many prospective buyers were unable to visit properties or make big purchases amid uncertainty about their future income and employment. Some analysts estimate that the policy shaved off 1.5 percentage points from China’s GDP growth in 20222.
The slump has also taken a toll on the financial health of developers, who have accumulated huge debts over the years. According to Moody’s, the total debt of rated Chinese developers reached 33.5 trillion yuan ($5.2 trillion) as of June 20213. Many of them have defaulted on their bond payments or sought debt restructuring, sparking fears of contagion in the broader economy. The most prominent case is Evergrande, the world’s most indebted property group, which owes more than $300 billion to creditors, suppliers and homebuyers4.
Government intervenes to stabilize the market
In response to the crisis, the Chinese government has shifted its stance from tightening to easing in recent months. It has suspended some of the borrowing limits imposed on developers in 2020, known as the “three red lines”, which capped their debt-to-asset, debt-to-equity and cash-to-short-term debt ratios5. It has also ordered banks to rescue unfinished projects and provide more credit to qualified developers6. Some local authorities have offered guarantees or subsidies to developers to help them raise funds or sell inventory.
The government’s intervention has shown some signs of reviving the market. The number of new homes completed fell by only 6% year-on-year in December, compared with an 18% drop in November. The decline in sales and prices also moderated slightly in January from the previous month1. Some developers have reported improved cash flow and lower financing costs.
However, the relief may be short-lived, as the underlying problems of the sector remain unresolved. The easing measures are mainly aimed at preventing a disorderly collapse of the market, rather than stimulating demand or supply. The government has reiterated its commitment to curb speculation and ensure that “houses are for living, not for flipping”. It has also maintained strict controls on household leverage and land supply, which limit the room for price appreciation and new construction.
Home buyers adopt a wait-and-see attitude
As a result, many home buyers are waiting out the property slump, hoping for better deals or clearer signals from the government. According to a survey by China Index Academy, a property research firm, only 21.5% of respondents said they planned to buy a home within six months in January, down from 23.9% in December. The proportion of those who said they would wait for more than a year rose from 19.4% to 20.9% over the same period.
Some buyers are also concerned about the quality and delivery of their homes, as developers cut corners or delay construction to save costs. A report by China Central Television, a state broadcaster, exposed several cases of shoddy workmanship and fraud by developers who used substandard materials or sold the same unit to multiple buyers. Some buyers have staged protests or filed lawsuits against developers who failed to deliver their homes on time or as promised.
The cautious attitude of buyers reflects the deep uncertainty that still hangs over China’s property market. While the government’s efforts to stabilize the sector have averted a worst-case scenario, they have not addressed the fundamental issues of overcapacity, indebtedness and speculation that have plagued it for years. Without structural reforms, such as developing a rental market, improving property rights and diversifying household wealth, China’s property market is doomed to repeat cycles of boom and bust.
