BEIJING (CAIXIN GLOBAL) - China's real estate market is no stranger to typical business cycles. Continual expansion and contraction in sales and investment have helped the market grow in value to four times the country's GDP.

But while market forces play a role in this cycle, China's real estate sector is most influenced by government policies. Since the end of last century when the country kicked off major housing market reform, there have been four distinct rounds of national policy tightening and easing.

During the global financial crisis in late 2008, Beijing issued trillions of yuan of fiscal stimulus and cut the benchmark interest rate several times. Housing sales bottomed out in December that year and surged 80 per cent in 2009, according to ratings agency China Credit Rating Co. Ltd.

In the first half of 2016, housing sales rose 44.4 per cent as the central bank funnelled cheap funds to local governments for shantytown renovation projects. The fifth round of easing began this year, after the latest round of tightening that started in 2020 pushed the market into a downward spiral in 2021, sparking a debt crisis among private developers and demolishing home-buyer confidence.

As pressure grows on China's growth and local government budgets, the authorities have been making it easy to get a mortgage, eased monetary policy and have encouraged lenders to fund mergers and acquisitions in the real estate sector.

But sales remain weak. In March, contracted sales by the 100 largest property developers fell 52.7 per cent by value from a year earlier, a steeper decline than in January and February, according to data released by consultancy China Real Estate Information Corp. High-frequency data suggest that housing sales continued shrinking this month.

This was despite 28 cities rolling out favourable mortgage policies for home-buyers in the first quarter and 15 cities relaxing curbs on purchases or offering subsidies, as well as officials' repeated pledges to ensure the housing market's "healthy development." Since March, banks in more than 100 cities have cut mortgage rates ranging between 20 basis points and 60 basis points.

Analysts and market participants say that policy easing by local governments alone can't restore confidence quickly, amid short-term factors like Covid-19 outbreaks and longer-term factors such as slowing household revenue growth, rising household debt and regional supply gluts.

Easing policies will also have less effect this time round as many households already bought real estate in the last round of easing from 2015 and 2016, said Lu Ting, chief economist at Nomura Holdings Ltd. The muted recovery reflects the ongoing structural change in the real estate industry as well as the broader economy, in which debt-driven infrastructure and housing spending will play a smaller role in driving growth.

Covid-19 disruptions

China's response to its worst Covid-19 outbreak in two years has been disrupting property sales and construction. Some analysts said the lock-downs imposed in dozens of cities in the first quarter would dampen the real estate market recovery this year and weaken the impact of government measures.

Shanghai's real estate market has basically frozen since the city has been in lock-down this month. Some cities in Jiangsu and Zhejiang provinces, which neighbour Shanghai, have also shut down some real estate offices, local media reported last week.

Country Garden Holdings Co. Ltd., the country's largest developer by sales, said last month that about 200 of its sales offices nationwide were closed due to local Covid-19 flare-ups, affecting nearly 30 per cent of its housing units on sale. The lock-downs and the toll they are taking on economic activity have also made home-buyers more cautious about taking on new debt.

Richard Li, an employee of a civil aviation company living in Guangzhou, bought a small apartment in 2017. He and his wife had planned to up-size once they had a baby. But after their first child was born last year, they dropped their property plans due to fear that a Covid-19 outbreak might suddenly affect their income.

"I'm not considering buying an apartment for now no matter how low the mortgage rate goes," Li told Caixin. Official data show that Chinese households have become more eager to save and less willing to borrow or spend. New household loans fell 50.8 per cent year-on-year in the first quarter, compared to a 10.3 per cent drop in the previous quarter, according to the People's Bank of China.

According to a central bank survey of 20,000 bank depositors in the first quarter of this year, 54.7 per cent said they want to save more, the highest figure since the data series began in 2009. Only 23.7 per cent of respondents planned to consume more, representing a third consecutive quarter of decline. Last month, retail sales dropped 3.5 per cent year-on-year, down from 6.7 per cent growth in the January-to-February period.

Another short-term factor likely to weaken the impact of government easing policies is the expectation that the liquidity crisis is far from over. "Home-buyers feel uncertain about property developers' future and are worried that more developers will be unable to finish the housing projects they buy," said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.

Although regulators have encouraged acquisitions, healthy developers are cautious about ponying up for distressed firms' assets due to the sluggish market and are avoiding taking on too much new debt.

Global ratings agency Moody's Investors Service said in a note earlier this month that the number of defaults could continue rising for the rest of 2022 and that the value of sales would keep dropping, though the magnitude of the drop would decline during the year.

Analysts expect to see more government policies to prevent the housing market from suffering deeper turmoil given the sector's significance to the economy, though it is uncertain how strong the measures might be.

The property sector has been estimated to drive 25 per cent of the economy via direct and indirect channels. A crashing property market is intolerable for governments, property firms, banks and homeowners - land sales are a crucial revenue source for local governments; real estate loans are major bank assets; properties are major assets for millions of families.

So far local governments' measures have not been strong, Chang Jian, chief China economist at Barclays Bank, told Caixin. "It is difficult to uplift the real estate market sentiment without policy adjustments at the national level, such as relaxing the three-red-line policy, or direct funding to property companies."

Misfiring in long run

Even though the property market may recover eventually, especially in the largest cities, several analysts and market insiders said three main long-term problems remain.

The first issue is that, according to some analysts, China's overall housing supply is sufficient thanks to decades of construction and the prospect of a low birthrate in the coming decades. According to a research by a team led by economist Ren Zeping, the ratio of finished residential units to the number of households rose to 1.09 in 2018 from 0.8 in 1978, implying that supply has reached demand.

The total value of China's housing market was US$62.6 trillion (S$86.7 trillion) in 2020, 4.1 times the country's GDP that year and 86 per cent higher than the US housing market, he estimated. In smaller cities and the country's inland and northeastern regions, there's a glut of housing supply. About 70 per cent of cities will see a surplus of housing in the future, Ren said.

The declining number of working-age people will also depress housing demand, he added. In the 2020 census, people aged 15 to 59 as a percentage of total population dropped to 63.4 per cent from 70.1 per cent in 2010.

Second, there could be less property speculation because of weaker expectations for long-term growth, overturning the decades-old belief that property prices would always rise.

Housing prices have already dropped a lot in some midsize and small cities, an executive at an asset management firm focusing on property investment, told Caixin. "Also, property developers' expectations have also weakened so they would likely make fewer investments."

The third factor is the debt problems of households, corporations and governments. Surging household debt and high housing prices have made home buying unaffordable for lots of families and dented their consumption. Authorities' concern about the resurgence of debt in the industry is expected to limit the space for policy easing.

Last year, the average new housing price was 9.1 times the average disposable household income in urban areas, higher than approximately 7 and 7.4 in 2008 and 2015, respectively, according to data compiled by E-House China R&D Institute, a property industry think tank.

In contrast, the households' leverage ratio - a gauge of outstanding debt as a share of nominal GDP - surged to 62.2 per cent at the end of 2021 from 39.2 per cent in 2015 and 17.9 per cent in 2008, according to data from state-backed think tank National Institution for Finance and Development. Although they've vowed to stabilise the property market, policymakers have shown no sign they'll drop the goal of curbing property speculation. "Unlike 2015, we expect Beijing to show much more reluctance from directly printing money to support the property sector," the Nomura economists said.

In a book on interactions between Chinese government and economic growth published last year, Fudan University economics professor Lan Xiaohuan argued that growth driven by debt-backed property infrastructure development has become unsustainable because productivity growth has failed to catch up with the expansion of credit and debt, resulting in debt risks, subdued consumer spending, a glut of investment in some places and many inefficient projects.

This story was originally published by Caixin Global.