As the Evergrande saga unravels, China’s property market can expect a further slowdown
- Even before Evergrande’s troubles, developers were taking steps to reduce leverage to meet new rules, a tightening of mortgage approvals had dampened housing demand and market concerns over default risks had led to higher financing costs
Finally, market concerns over rising default risks among property developers have already led to higher financing costs, dragging on real estate investment. This is likely to persist until there is more clarity on how the Evergrande saga will eventually be resolved.
Given this setting, expect the real estate outlook to be lacklustre in the fourth quarter and next year. The risk of a sharper slowdown in real estate activity can’t be ruled out, especially at a time when China’s economic momentum is dropping off after last year’s strong recovery.
In a more severe downside scenario in which the housing market turns sour quickly, or if the financial and economic fallout of Evergrande’s restructuring intensifies, a sharp economic slowdown would cause housing demand to fall precipitously.
Property developers’ financing costs would spike and funding could dry up. The government would probably take more significant steps to adjust its overall policy stance on property and more generally to limit the impact on overall economic growth.
Still, some of the fundamentals remain supportive of real estate investment and the housing market more broadly.
First, the stock of unsold housing is relatively low. Housing inventory, as measured by floor space awaiting sale, was only equivalent to 12 per cent of total floor space sold in the past six months. This was well below the average ratio of 22 per cent over the past decade or so. The need to replenish housing inventory will continue to support real estate investment.
With regard to Evergrande’s troubles and the deceleration in property activity, Beijing could ease policies somewhat to prevent real estate investment from declining significantly, without substantially shifting away from its relatively tight regulatory and credit stances on developers.
In particular, banks – especially those that still have room to increase exposure to the real estate sector under regulatory caps – could be asked to extend credit to property developers and their suppliers.
That said, property developers may not be keen to increase their borrowing, given that many still need to improve their balance sheets to meet the three red lines. So the impact of easing could be less than expected unless the government extends the transition period to meet these requirements beyond the current mid-2023 deadline.
Meanwhile, as the housing market downturn persists, some lower-tier cities may well start to relax mortgage restrictions and other property cooling measures to boost sales and sentiment. This could encourage real estate investment and construction activity, staving off a sharp slowdown in growth in these local economies.
In the longer term, urban housing sales and real estate investment should continue to grow at a reasonable, but much more sedate, pace than in the past. The urbanisation campaign and still-high savings rate (albeit declining due to an ageing population) will continue to support future real estate investment. But house price increases are likely to be more moderate than in the previous decade.
Tommy Wu is a lead economist at Oxford Economics