China’s bursting housing bubble to rock the economy for a long time

BEIJING: The wave of stimulus aimed at reviving China’s housing market – billions in bank loans, interest rate cuts and support for developers – has done little to help Echo sell her home near Shanghai.

The media worker has received only four nibbles from potential buyers in six months, and is considering a 10% cut to her asking price of 3.3 million yuan (RM2.16mil). She thinks this stagnant housing market, the worst in China’s modern history, will drag on for years.

“Everyone is waiting for a steeper drop in home prices before they make up their mind to buy,” said Echo, who asked to be identified only by her first name for fear of retribution given her negative outlook. “There’s going to be a vicious cycle.”

While many economists said China’s crippling housing downturn won’t get much worse and that the stimulus will kick in this year or next, the reality on the ground for sellers like Echo is much bleaker.

Home sales and prices remained sluggish amid an economic slowdown and zero-Covid restraints.

Consumer confidence is near a record low, and a recent central bank survey showed 73% of households expect property prices to stay unchanged or drop in the near term. Not even the Golden Week holiday, normally a good time for real estate, could provide a spark, with sales off 38%.

As president Xi Jinping and other Communist Party leaders gather soon for their twice-a-decade congress, few issues matter more than a housing market that’s been hobbled by Beijing’s own policies aimed at reducing credit risk while making homes more affordable in the name of “common prosperity”.

With estimates ranging from US$2.4 trillion (RM11 trillion) for the new-home market to US$52 trillion (RM244 trillion) for existing inventory, the sheer expanse of China’s residential housing sector means there’s plenty at stake.

Real estate accounts for about a quarter of domestic output and almost 40% of household assets.

Bursting a bubble of this size without triggering a financial crisis is difficult for any government, and previous attempts in Japan from 1989, and the United States in 2007-08 proved to be disastrous.

Policymakers are showing increased urgency to deal with the fallout. Among the most recent moves, the central government is allowing nearly two dozen cities to lower mortgage rates.

Financial regulators have told the biggest state-owned banks to extend at least 600 billion yuan (RM392bil) of financing to the industry. Beijing even offered a rare tax break for people who buy a new home within a year of selling.

So far, none of the moves has done much to restore confidence in a sector that’s endured endless pain in the last 18 months.

The government crackdown on borrowing has hammered developers like China Evergrande Group, sparking a wave of more than US$50bil (RM234bil) in dollar bond defaults.

A gauge of high-yield debt remains near the lowest in more than a decade, while the main property stock index has tumbled 39% this year. Property stocks and bonds are unlikely to rally until home sales pick up.

Consumers are feeling the pinch too. The turmoil has sparked unprecedented protests after the developer cash crunch led to construction delays across China, prompting hundreds of thousands of homeowners to boycott their mortgage payments until their homes get built.

The potential spillover effects on the economy are massive. Millions of households are seeing their nest egg quickly lose value while Covid lockdowns have dragged down consumer confidence. That’s translating into a record increase in savings and the weakest demand for loans since before the global financial crisis. — Bloomberg