Unfinished buildings in different cities of China has attracted extensive attention. After all, even a tiny change in the real-estate industry has impacted the country’s economy to a great extent.
China’s overall real-estate investment has been rising as a fraction of fixed asset investment. In 2021, the real-estate investment reached around RMB 15 trillion, accounting for 26% of fixed asset investment. Therefore, it is a significant driver of China’s economic development.
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The Real-Estate Industry of China has Gone Downhill and is Not Stabilized Yet
According to China Markets News, the real-estate market of China has gone downhill since 2015. The cost of residential properties have continued to decrease since the later part of 2021. The second-tier and third-tier cities are going through negative growth unfortunately. In June 2022, the area of commercial housing was 180 million square meters. Will this fall in prices continue?
- The mortgage rates now are high, with 5% first-time buyers. This is more than the average level of 4% in the middle part of 2016, which restricts people’s inclination to buy houses.
- The leverage ration of the country’s household sector is approximately 60%, which is twice of what the percentage was in 2015. Between 2016 and 2019, when the price of the houses increased, residents overspent, leaving little room for extra leverage to purchase a house.
- The residents’ eagerness to elevate leverage has also reduced.
Meanwhile, there are plenty of unfinished homes, further declining the willingness of people to make a purchase. Since 2016, the sales of commercial properties have outpaced completion. The collective sales area has reached 10 billion square meters. Only 6 billion square meters of properties has been completed. In the next decade, the real-estate developers will concentrate on completion and not on land acquisition or starting construction projects.
In fact, housing organizations have struggled a lot to acquire land. In 2022, land dealings halved compared with the similar period in 2021. Only 75 million square meters of housing land was traded in a hundred medium and large cities. The reduction in land transactions has put a substantial amount of pressure on several construction projects, as well as the expenditure and revenue of local governments.
China’s Real-Estate Risks are Quite Manageable
China needs to make sure that the systemic risks do not happen down the road. As of now, the risks in the real-estate industry are in control, with no crisis temporarily. This is because –
- Firstly, the current downward cycle of interest means the likelihood of mortgage defaults is comparatively small. Declining interest rates will decrease pressure on the household mortgages. Even though the hike in interest rate have simplified the monetary policy of China, there is still an opportunity to make further improvements, considering the country’s negligible CPI.
- Secondly, the housing prices on the second-tier and third-tier Chinese cities have fallen by 5%. The residents in China often pay a down payment of 30% on the purchases. Thus, it is difficult to notice large-scale defaults especially when the reduction in house prices is less than down payment ratio.
- Commercial housing is a substantial asset for the residents of China. If there is no unemployment and lack of repayment sources, the chance of household owners defaulting is low. The unemployment rate in China currently is between 5% and 6% in 31 cities. Furthermore, unemployment has decreased recently due to a bit of improvement in the coronavirus situation.
According to China Markets News, China has been a slump in terms of real-estate prices in the years 2012, 2014, and 2018. This slowed down economic growth to a great extent. The cost of commercial housing is anticipated to decrease for a prolonged period.
Since 2010, the driving impact of real-estate on China’s economy has become less prominent, primarily due to an elevation in the household leverage, but also because the capability to trigger economic development through fixed asset investments has decreased.
In the future, China will lower its target of economic development. The country will also focus on steadying prices and employment, and depend on internal consumption to accomplish long-term growth. This means China has to end its reliance on the real-estate infrastructure.
