Residential buildings under construction at Tahoe Group’s Cathay Courtyard development in Shanghai, on July 27. Photo: Bloomberg
Opinion
Macroscope
by Aidan Yao
Macroscope
by Aidan Yao
How China can avoid a property market disaster, without having to bail out developers
Beijing’s insistence on housing being for living in rather than speculation suggests a bailout for the sector will not be forthcoming
Instead, there needs to be a focus on managing risks in the short term, finding new growth engines in the medium term and eventually reshaping the housing market
The unfolding crisis in China’s real estate market has put tremendous pressure on an economy already struggling against the Covid-19 pandemic. The easing of local policies has so far failed to arrest the market decline, and Beijing has shown little appetite for altering its stance of “housing is for living, not speculation”.
How can China get out of this mess? There are three areas of policy action necessary to get the market on a sustainable path.
First, there must be a short-term focus on managing risks. The insistence that housing is not for speculation suggests Beijing is prepared to endure a painful adjustment. A wholesale bailout of the sector that kicks the can further down the road appears less likely than in previous downturns. As such, the government’s near-term focus is likely to be managing the adjustment’s fallout rather than preventing it.
Recent reports of homebuyers halting mortgage payments are evidence of the crisis spreading to the wider economy. While the scale of the problem looks small, the risk of the boycotts snowballing into a bigger crisis cannot be ruled out. So far, concerted action by the authorities and state-owned financial institutions appears to have been successful in managing the situation.
However, the job of risk management is far from over. The collapsing property market has inflicted pain on many related industries. Beijing’s infrastructure push has helped pick up some slack in upstream industries such as steel and cement, and consumption vouchers have cushioned the blow downstream.
However, these offsets are insufficient amid the effects of the housing downturn. Hence, the policy focus in the coming months will remain on ring-fencing troubled developers and managing the spillover effects of the market turmoil.
In the medium term, there must be a focus on finding new growth engines. The property sector has grown to a huge size thanks to several structural tailwinds, including rapid urbanisation, the need to allocate households’ burgeoning wealth and the financialisation of real estate assets, such as the introduction of mortgages and the use of property as collateral for borrowing.
However, the turning of these tailwinds to headwinds is forcing a paradigm shift. Slowing population growth and urbanisation means demand for housing has peaked. Speculative demand is hampered by government policies and gloomy housing price expectations.
Households have more options than just property in which to invest their savings. Also, the supply of housing has increased in recent years thanks in part to shanty town renovation programmes.
A dramatic shift from excess demand to excess supply in the property market means it is more difficult to stimulate activity than during supply shortages. As a structurally declining industry, real estate can no longer be relied on as a sustainable engine of economic growth.
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Therefore, the core medium-term task for Beijing is to find different sources of growth. In this regard, decarbonisation could play a role. The investment needed to remould China’s coal-heavy energy system is enormous. Given its size, the energy industry has the potential scale to offset lost growth from real estate.
Also, the green energy transition will touch all corners of the economy and society, potentially creating a longer supply chain than that of real estate. Finally, decarbonisation is a multi-decade development theme just like urbanisation, which provided lasting growth for property market development.
In the long term, Beijing needs to focus on reshaping the housing market. The fundamental problem facing the sector is that increases in housing supply are meeting structural declines in demand. It is not that China lacks potential demand, though, as the prospect of continued urbanisation and the need to replace large amounts of older housing stock point to a great need for new construction.
Men work at a construction site for apartment blocks in Beijing on July 15. Photo: Reuters
The problem is that China lacks effective demand because of poor housing affordability, particularly in top- and second-tier cities. Redesigning the real estate market is a necessary long-term task, and China needs to expand its supply of social housing to meet the needs of low-income earners.
Part of this could be done by the government buying surplus housing stock from troubled developers and converting it into public housing. This has the added benefit of helping developers while providing affordable residences for the underprivileged.
The private part of the market is reserved for wealthy households seeking properties in more modern, higher-end estates. A dual-track redesign of the real estate market – similar to that of Singapore – could be what is needed to put the sector on a sustainable path.
Avoiding a crash landing in China’s real estate market is a complex task. Timely action in the above three areas could go some way to ensure a less disruptive transition in a critical part of the economy. With pain already evident across several sectors, Beijing has to act fast to avoid a systematic disruption akin to the US subprime crisis or a Japan-style lost decade.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers
