China's bursting housing bubble will rock the economy for years

BEIJING - The wave of stimulus aimed at reviving China's housing market – billions in bank loans, interest rate cuts and support for developers – has done little to help Ms Echo sell her home near Shanghai.

The media worker has received only four nibbles from potential buyers in six months and is considering a 10 per cent cut to her asking price of 3.3 million yuan (S$660,000). She thinks this stagnant housing market, the worst in China's modern history, will drag on for years.

"Everyone is waiting for a steeper drop in home prices before they make up their mind to buy," said Ms Echo. "There is going to be a vicious circle."

While many economists say China's crippling housing downturn will not get much worse and that the stimulus will take effect in 2022 or 2023, the reality on the ground for sellers like Ms Echo is much bleaker.

Home sales and prices remain sluggish amid an economic slowdown and zero-Covid-19 restraints. Consumer confidence is near a record low, and a recent central bank survey showed 73 per cent of households expect property prices to stay unchanged or drop in the near term. Not even the Golden Week holiday, normally a good time for real estate, could provide a spark, with sales off 38 per cent.

As President Xi Jinping and other Communist Party leaders gather on Sunday for their twice-a-decade congress, few issues matter more than a housing market that has been hobbled by Beijing's policies aimed at reducing credit risk while making homes more affordable in the name of "common prosperity".

With estimates ranging from US$2.4 trillion (S$3.4 trillion) for the new-home market to US$52 trillion for existing inventory, the sheer expanse of China's residential housing sector means there is plenty at stake.

Real estate accounts for about a quarter of domestic output and almost 40 per cent of household assets. Bursting a bubble of this size without triggering a financial crisis is difficult for any government, and previous attempts in Japan from 1989, and the United States in 2007-08 proved to be disastrous.

Policymakers are showing increased urgency to deal with the fallout. Among the most recent moves, the central government is allowing nearly two dozen cities to lower mortgage rates. Financial regulators have told the biggest state-owned banks to extend at least 600 billion yuan of financing to the industry. Beijing even offered a rare tax break for people who buy a new home within a year of selling.

So far, none of the moves has done much to restore confidence in a sector that has endured endless pain in the last 18 months. The government crackdown on borrowing has hammered developers such as China Evergrande Group, sparking a wave of more than US$50 billion in dollar bond defaults.

An analysis by the International Monetary Fund (IMF) this week showed that 45 per cent of developers might not be able to cover their debt obligations with earnings, and 20 per cent of them could become insolvent if their inventory value is marked to current property prices.

A gauge of high-yield debt remains near the lowest in more than a decade, while the main property stock index has tumbled 39 per cent in 2022. Property stocks and bonds are unlikely to rally until home sales pick up.

Consumers are feeling the pinch too. The turmoil has sparked unprecedented protests after the developer cash crunch led to construction delays across China, prompting hundreds of thousands of home owners to boycott their mortgage payments until their homes get built.

The potential spillover effects on the economy are massive. Millions of households are seeing their nest egg quickly lose value while Covid-19 lockdowns have dragged down consumer confidence. That is translating into a record increase in savings and the weakest demand for loans since before the global financial crisis. In the year through September, banks extended the least amount of mortgages in any year since 2015.

The current downturn, now in its second year, is already breaking records, making it the steepest and longest slump since private home ownership began in the 1990s. While sales in big cities such as Beijing, Shanghai and Shenzhen saw a slight uptick in the first weeks of September, the overall market by dollar value at the 100 biggest developers was still down 25 per cent in September from a year earlier.

Bloomberg Economics estimates about 2.8 billion sq m of real estate is currently sitting empty – an area 47 times the size of Manhattan.

Even as Beijing takes steps to bolster the market, the government has stuck to its mantra that "houses are for living in, not for speculation" – suggesting there is no interest in going back to the go-go era of the last decade. Finishing uncompleted homes is more about curtailing social unrest and safeguarding financial stability.

"The central authorities will likely have to make some sort of public and credible commitment to ensure that housing construction will be seen through to completion," said Mr Adam Wolfe, emerging markets economist at Absolute Strategy Research in London. "A few words from Xi Jinping that this is a political priority just might do the trick."

That equanimity is fuelling bets that Mr Xi will do more during his third term to ensure China pulls through the crisis.

Morgan Stanley's economists recently took a stab at predicting what happens if Beijing drags its feet, modelling a stress test that would result in growth of just 1 per cent in the first half of 2023 and 11 million job losses. The IMF painted its own bleak picture of how the housing slump may morph into a banking crisis. In one scenario, 15 per cent of small banks may go under.

"All you can do is look at history and make an educated guess," said Mr Larry Hu, an economist at Macquarie Group, who in 2021 predicted that Beijing's tightening policies would last into 2022. "What if the authorities can tolerate another 12 months of a downcycle? That is your new nightmare scenario." BLOOMBERG