China: Structural Issues in the Real Estate Market
2024-03-27
■ In China, commercial real estate's adjustment speed has slowed, residential sales have been sluggish, and prices have continued declining.
■ The excess housing stock has not been digested yet, and from the perspective of population dynamics, the growth of housing demand in the medium term is facing difficulties.
According to China's leading economic indicators for January and February released last week, industrial added value growth (up 7.0% year-on-year) and fixed assets investment (excluding rural areas, up 4.2% year-on-year) accelerated, and manufacturing activity remained strong. However, the growth in retail sales (a year-on-year increase of 5.5%) and service industry production index (a year-on-year increase of 5.8%) has weakened, indicating weak physical and service demand growth.
Even after lifting the zero COVID policy, the relatively slow recovery of household consumption in China is partly due to the adjustment of the real estate market, debt repayment, and reduced future expectations, which have suppressed domestic demand. In the real-estate-related indicators from January to February, the decline in real estate sales (measured by floor area, a year-on-year decrease of 20.5%) and financing scale of real estate development enterprises (a year-on-year decrease of 21.4%) has expanded, mainly affecting the price index of newly-built residential buildings in 70 cities (Reuters calculated a year-on-year decline of 1.4% and a month on month decrease of 0.3%). Despite strengthened policy support, the real estate market adjustment is still ongoing. However, the decline in real estate development investment (a year-on-year decrease of 9.0%) has narrowed to the lowest level in a year, and the office and commercial parts of real estate sales (measured by floor area) have exceeded last year's levels. The adjustment speed of commercial real estate is slowing down. Most of the problems in China's real estate market lie in the decline in housing prices and sluggish sales. On February 20th, the People's Bank of China lowered the most favorable loan interest rate (LPR) for housing loans with a term of 5 years by a maximum of 0.25 percentage points, sparking market attention on the extent to which this move stimulates housing demand and supports housing prices. However, the essence of a sluggish housing market is an imbalance between supply and demand. Although policy support can suppress sharp adjustments, it is difficult to expect an early improvement in the housing market when the excess stock is indigestible.
The government economic report on March 5th mainly mentioned real estate policies from the perspective of financial risk control. Apart from adjustment policies such as integration and restructuring, specific measures are limited to addressing the reasonable funding needs of real estate development enterprises, promoting urbanization policies, and promoting the development of the affordable housing market on the supply side. There are almost no support measures for the family sector as the ultimate demand for housing. China is gradually entering the third peak period of population born in the late 1980s, and people in this age group are about to enter the age of purchasing a house. There is expected to be a specific demand for housing in the short term. However, the population below this age group is relatively small, and the housing purchase age will likely decrease in the medium term. In addition, the unemployment rate of young people (excluding students, 15.3% in February) is relatively high, which may also constrain future housing purchases. Structurally, it is unlikely that there will be an increase in housing demand.
■ The excess housing stock has not been digested yet, and from the perspective of population dynamics, the growth of housing demand in the medium term is facing difficulties.
According to China's leading economic indicators for January and February released last week, industrial added value growth (up 7.0% year-on-year) and fixed assets investment (excluding rural areas, up 4.2% year-on-year) accelerated, and manufacturing activity remained strong. However, the growth in retail sales (a year-on-year increase of 5.5%) and service industry production index (a year-on-year increase of 5.8%) has weakened, indicating weak physical and service demand growth.
Even after lifting the zero COVID policy, the relatively slow recovery of household consumption in China is partly due to the adjustment of the real estate market, debt repayment, and reduced future expectations, which have suppressed domestic demand. In the real-estate-related indicators from January to February, the decline in real estate sales (measured by floor area, a year-on-year decrease of 20.5%) and financing scale of real estate development enterprises (a year-on-year decrease of 21.4%) has expanded, mainly affecting the price index of newly-built residential buildings in 70 cities (Reuters calculated a year-on-year decline of 1.4% and a month on month decrease of 0.3%). Despite strengthened policy support, the real estate market adjustment is still ongoing. However, the decline in real estate development investment (a year-on-year decrease of 9.0%) has narrowed to the lowest level in a year, and the office and commercial parts of real estate sales (measured by floor area) have exceeded last year's levels. The adjustment speed of commercial real estate is slowing down. Most of the problems in China's real estate market lie in the decline in housing prices and sluggish sales. On February 20th, the People's Bank of China lowered the most favorable loan interest rate (LPR) for housing loans with a term of 5 years by a maximum of 0.25 percentage points, sparking market attention on the extent to which this move stimulates housing demand and supports housing prices. However, the essence of a sluggish housing market is an imbalance between supply and demand. Although policy support can suppress sharp adjustments, it is difficult to expect an early improvement in the housing market when the excess stock is indigestible.
The government economic report on March 5th mainly mentioned real estate policies from the perspective of financial risk control. Apart from adjustment policies such as integration and restructuring, specific measures are limited to addressing the reasonable funding needs of real estate development enterprises, promoting urbanization policies, and promoting the development of the affordable housing market on the supply side. There are almost no support measures for the family sector as the ultimate demand for housing. China is gradually entering the third peak period of population born in the late 1980s, and people in this age group are about to enter the age of purchasing a house. There is expected to be a specific demand for housing in the short term. However, the population below this age group is relatively small, and the housing purchase age will likely decrease in the medium term. In addition, the unemployment rate of young people (excluding students, 15.3% in February) is relatively high, which may also constrain future housing purchases. Structurally, it is unlikely that there will be an increase in housing demand.