Home sales in China are stalling as restrictions on loans and worries about the financial health of developers deter homebuyers, casting a veil on an industry that is at the heart of China’s economy.
In recent days, many top developers have reported declining sales figures for September, with many showing year-over-year declines of more than 20% or 30%. This is a sharp drop in a month leading up to China’s Oct. 1 National Day, the promotions of which typically make it one of the strongest selling times of the year.
If prolonged, the severe recession could have serious economic consequences. Real estate has played a disproportionate role in the Chinese economy in recent years, compared to its importance in many other countries, and Chinese families have much of their wealth tied up in homes and investment properties. The slowdown in sales could spill over into investment and construction, which could hurt local growth, jobs and finances. Discounting to boost sales could hurt home prices and hurt household wealth.
Developers such as China Evergrande Group EGRNF 0.66%
are publicly struggling to adjust to a series of changes, including rules dubbed the ‘three red lines’ that were introduced last year to curb the growth of financially weaker corporate debt, as well as ceilings on mortgage loans from banks. Some did not pay interest, and stock and bond prices fell sharply across the industry. The news has alarmed homebuyers, especially as developers are selling many apartments before they are built.
The slowdown in sales is in part the result of tighter government policy on mortgages and lower homebuyer confidence, said Cheng Wee Tan, senior equity analyst at Morningstar. Customers fear developers won’t be able to complete their projects, and media reports of the unfinished constructions of Evergrande have added to those fears, he said.
Huang Jun, a 25-year-old real estate agent in Foshan, a city in the southern province of Guangdong, said he saw new home prices in the city center fall about 20% from a recent peak in March, at the equivalent of about $ 346. per square foot on average.
“Virtually all of the developers have offered discounts in the past two months,” said Huang, who worked as a local real estate agent for four years. “Just like Evergrande, they must be under pressure to sell more apartments” to pay off their loans, he said.
He said the discounts had attracted potential buyers during the recent national holiday week, but few had made the deal. “Most of them want to wait and see if the prices drop further,” he said. “In China, most people prefer to buy apartments when prices are rising, not falling.”
Tuesday, Longfor Group Holdings Ltd.
and China Resources Land Ltd.
became the last major real estate companies to release weak data. In a filing, Longfor said September contract sales totaled the equivalent of $ 3.1 billion. This was down almost 33% from the previous year. China Resources Land recorded a drop of almost 24%.
Contract sales are a widely watched industry metric. They reflect new contracts signed with home buyers and are a more forward-looking measure than revenues, which are typically recorded when companies hand over completed units to buyers.
Stronger players were not spared, with contract sales down 34% at China Vanke Co.
, the country’s largest developer by market value. Unlike many of his peers, Vanke also enjoys investment grade credit ratings, indicating that his debt is considered relatively safe.
Evergrande has yet to release figures to the Hong Kong Stock Exchange, but warned on September 14 that “continued negative media reports” had deterred homebuyers, which would likely lead to a significant drop in sales in September. The other developers have not given any explanation for their reduced sales.
The company’s official figures broadly match earlier data from CRIC, a Chinese data provider, which previously said total contract sales among China’s top 100 developers fell 36% year-on-year in September.
Falling sales could create stress for more developers, potentially preventing some from completing existing projects or forcing them to scale back future projects, said Logan Wright, director of market research in China at Rhodium Group.
“If this continues, the wider concern is whether any of the tightening measures come at the expense of the health of the industry as a whole,” Wright said. “You are going to see weaker financial conditions and weaker construction activity spill over into the wider economy.”
From construction sites to showrooms, the industry is a major source of employment for both blue-collar and white-collar workers in China. About 18% of China’s 285 million migrant workers earned income from construction-related jobs in 2020, according to China’s National Bureau of Statistics, while many college graduates work as real estate agents. Local governments, on the other hand, depend on the sale of land to developers for about a third of their income.
In total, China’s residential real estate market, including construction activities and services, accounted for around 23% of gross domestic product in 2018, according to Goldman Sachs..
The bank’s economists estimated that a 15% drop in land sales and a 5% drop in real estate sales and house prices would cause China’s GDP to drop 1.4% next year. Worst case scenario, they said a 30% drop in land sales and a 10% drop in real estate sales this year to year could push GDP down to 4.1%, l biggest impact from tighter financial conditions.
For now, declines in contract sales reflect falling sales volumes more than falling prices, suggesting that while deals dry up, prices have yet to be so badly affected.
At Sunac China Holdings Ltd.
, for example, the average selling price fell only 1.4% to the equivalent of just under $ 200 per square foot. But its contract sales area fell 31% to about 832 acres.
Still, there are signs that Chinese consumers think prices could go down. In the third quarter, the share of urban bank depositors in China who expect house prices to rise fell to 19.9%, according to a survey released by China’s central bank. This proportion is down from 25.1% a year ago and its lowest since the first quarter of 2016.
Falling sales could also prompt more developers, desperate to collect cash to repay debts, to offer larger discounts, which could put downward pressure on house prices.
Over the past month, officials in at least eight cities have banned developers from reducing house prices deemed too high and in some cases instituted minimum prices, according to Chinese state media.
—Anniek Bao contributed to this article.
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