S&P says China’s real estate sales tend to decline worse than 2008

Most apartments in China are sold before the developers complete construction. Pictured here June 18, 2022, people are choosing apartments at a development in Huai’an, Jiangsu province, near Shanghai.

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BEIJING – China’s property sales are expected to fall more this year than during the 2008 financial crisis, according to new estimates by S&P Global Ratings.

National property sales are likely to fall about 30% this year – nearly twice lower than their previous forecast, the ratings agency said. More and more Chinese homebuyers are suspending mortgage payments.

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

Since the end of June, unofficial figures show a rapid increase in Chinese homebuyers refusing to pay their mortgages on several hundred unfinished projects – until developers complete the construction of the apartments.

Most homes in China are sold prior to completion, creating an important source of money for developers. Businesses have struggled to get financing in the past two years as Beijing has prevented them from relying heavily on debt for growth.

Currently, the mortgage strike is hurting market confidence, delaying the recovery of China’s property sector to next year, not this year, Mr. Liu said.

If house prices plummet, this could threaten financial stability.

As property sales fall, many developers are likely to fall into financial distress, she said, warning the drag could even spread to healthier developers “if the situation doesn’t go away.” restrained.”

There is also the possibility of social unrest if homebuyers do not receive the apartment they paid for, Liu said.

Limited spread outside of real estate

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

Critically, however, Liu said her team doesn’t expect house prices to fall sharply due to the local government’s policy to support price. Their forecast is that home prices will fall between 6% and 7% this year, followed by steadying.

And while S&P economists estimate about a quarter of China’s GDP is directly and indirectly affected by real estate, only a fraction of that 25% is at risk, Liu said. Note that the company does not have specific figures on the impact of mortgages. strike on GDP.

A bigger problem to clear up

China’s real estate sector is intertwined with local governments and land-use policies, making the industry’s problems difficult to solve quickly.

In analysis published Tuesday, Xu Gao, director of the China Chief Economic Forum, pointed out that the amount of residential floor space completed each year has actually not grown on average since 2005, in as the amount of land sold has decreased on average during that time.

The contraction contrasts with the rapid growth of both sold land and completed housing prior to 2005, when the new land tender process went into full effect, he said. The new bidding process has tightened the supply of land and real estate, pushing up housing prices higher than speculation, Xu said.

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Goldman Sachs said investors should consider only the best developers among China’s high-yield real estate debt. “We see their lower dollar relative value pricing in longer-maturity bonds.”

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

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

One possible scenario he offers is one in which credit worries remain elevated but there are no truly systemic concerns, creating a negative reverberation for investor sentiment. high-yield credit markets.

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