China property sales set to plunge worse than 2008, S&P says

Most apartments in China are sold before developers have finished building them. Pictured on June 18, 2022, people select apartments in a housing estate in Huai’an, Jiangsu province, near Shanghai.

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BEIJING — China’s property sales are expected to plunge more this year than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings.

Domestic property sales are likely to fall about 30% this year, nearly twice as bad as their previous forecast, the rating agency said, citing a growing number of Chinese buyers putting mortgage payments on hold.

Such a drop would be worse than in 2008, when sales fell about 20%, Esther Liu, director of S&P Global Ratings, said in a telephone interview Wednesday.

Since late June, unofficial tallies show a rapid increase in the number of Chinese homebuyers refusing to pay their mortgages on a few hundred unfinished projects – until developers finish building the apartments.

Most homes in China are sold before completion, generating an important source of cash flow for developers. Companies have struggled to secure financing over the past two years as Beijing clamped down on their heavy reliance on debt for growth.

Now the mortgage strike is hurting market confidence, delaying the recovery of China’s real estate sector to next year rather than this year, Liu said.

If there is a sharp drop in house prices, this could threaten financial stability.

As property sales plummet, more developers are likely to fall into financial difficulty, she said, warning the drag could even spread to healthier developers “if the situation is left unchecked”.

There’s also potential for social unrest if buyers don’t get the apartments they paid for, Liu said.

Limited spillovers outside real estate

Although the number of mortgage strikes has increased rapidly in a matter of weeks, analysts generally do not expect a systemic financial crisis.

In a separate note on Tuesday, S&P estimated suspended mortgage payments could affect 974 billion yuan ($144.04 billion) of those loans, or 2.5% of Chinese mortgages, or 0.5% of total mortgages. loans.

“If there is a sharp decline in house prices, this could threaten financial stability,” the report said. “The government sees this as important enough to rapidly deploy relief funds to deal with the erosion of confidence.”

Chinese policymakers encouraged banks to support developers and stressed the need to complete construction of apartments. Authorities have generally expressed more support for real estate since mid-March, while maintaining a mantra that “houses are for living in, not speculating on.”

“What worries us is that the scale of this support is not large enough to save the situation, [which] now turn to [a] worst direction,” Liu said.

However, critically, Liu said his team does not expect a sharp decline in property prices due to the local government’s policy to support price. They predict a 6-7% drop in house prices this year, followed by stabilization.

And while S&P economists estimate that about a quarter of China’s GDP is affected directly and indirectly by real estate, only part of that 25% is at a level of risk, Liu said, noting that the company does not there are no precise figures on the impact of the mortgage. GDP strikes.

A bigger problem to solve

China’s real estate industry is closely tied to local governments and land-use planning policy, which makes problems in the industry difficult to solve quickly.

In an analysis published on Tuesday, Xu Gao, director of the China Chief Economist Forum, pointed out that the residential area completed each year has actually not increased on average since 2005, while the area of ​​land sold has decreased on average during this year. period.

The contraction contrasts with the rapid growth in the area of ​​land sold and residences completed before 2005, when a new land bidding process went into full effect, he said. The new bidding process has tightened the supply of land and real estate, pushing up house prices more than speculation, Xu said.

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Investors should consider only the top developers in China’s high-yield property debt, Goldman Sachs said in a report Tuesday. “We see relative value in their lower-dollar-priced, longer-dated bonds.”

But overall, it’s a story of uncertainty in one of China’s biggest industries.

“For us, the continued tensions in the real estate sector coupled with the uncertainties related to the COVID measures suggest a more gloomy outlook for China,” wrote credit strategist Kenneth Ho.

One possible scenario he presented is one in which credit concerns remain elevated but with no real systemic concerns, creating a negative overhang for investor sentiment in high-yield credit markets.

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