China’s Real Estate Sector: Managing the Medium-Term Slowdown

IMF News, February 2, 2024

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Canonical URL: China’s Real Estate Sector: Managing the Medium-Term Slowdown

Real estate has long been important for China’s economy, driving its rapid growth in recent decades and accounting for as much as 20 percent of activity.
Home prices became significantly stretched relative to household incomes in the decade before the pandemic.
Consumers preferred to invest considerable savings in real estate given the scarcity of attractive alternative savings options.
Expectations of continued increases in home and land prices allowed property developers to borrow rapidly, with land sales providing crucial revenue for local governments.

Authorities took resolute action to rein in excessive developer borrowing and other property sector risks after the start of the pandemic.
Real estate activity has since contracted sharply.
Authorities have recently aimed to boost rental housing, expand affordable housing, and upgrade under-developed urban neighborhoods.
Housing starts have fallen by more than 60 percent relative to pre-pandemic levels.
Sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future.

Many developers have become non-viable but have avoided bankruptcy thanks in part to rules that allow lenders to delay recognizing their bad loans, which has helped mute spillovers to real estate prices and bank balance sheets.
Home prices have decreased only modestly in part because some cities have sought to limit price declines through rules and guidance on listing prices.
Structural factors will put additional pressure on the housing market in coming years, in particular demographic change:
- The need for additional new housing will diminish in coming years as the population declines and urbanization slows.
- Large public subsidies in the previous decade helped millions move to newer housing from older buildings lacking modern amenities; such demand will likely be more limited going forward.
- Depressed land sale revenues have tightened local government fiscal constraints and fewer residents live in older housing.

Analysis projects new real estate investment into the medium term under several scenarios for the evolution of fundamental demand as well as the impact of the overhang of inventories and other supply-side pressures.
In these scenarios, real estate investment would likely fall 30 percent to 60 percent below its 2022 level, rebounding only very gradually.
This would be comparable to major housing downturns in other countries with similarly sizable slowdowns in starts.
Increases in spending on affordable housing and urban redevelopment planned this year could help offset some of the investment decline but are not likely to sufficiently reduce the large overhang of housing inventories held by troubled developers.

Allow more market-based adjustment in home prices and quickly restructure insolvent developers to help clear the overhang of inventories and ease fears of continued price decline.
Phase out rules allowing banks to avoid recognition of bad loans to developers.
Support viable developers while tightening rules to prevent future build-ups of risk.
Insure homebuyers against the risk that developers fail to complete purchased homes to help restore confidence and ease sales pressures for developers.
Implement stricter escrow rules for the use of presale financing to improve legal protections for homebuyers.
Introduce a nationwide property tax and improved pension or other saving options to help reduce households’ need to invest in housing.
Pursue fiscal reforms that close local governments’ structural mismatch between revenues and spending obligations to reduce reliance on land sales and property activity.

Source: IMF News — By Henry Hoyle and Sonali Jain-Chandra, February 2, 2024.