ISTANBUL

Housing prices are falling in China, and its real estate market is facing a slowdown in investments, deepening concerns.

New and previously owned housing prices fell in many of the 70 large and medium-sized in the country, specifically in Beijing, Shanghai, Guangzhou, and Shenzhen by 0.8%, in some 31 large second-tier cities 2%, and some 35 medium-sized cities 3.4%, according to the country’s National Bureau of Statistics.

Shanghai, the country’s most populous city, saw housing prices rise 5.7% on an annual basis, becoming the exception among first-tier cities, while previously owned housing prices fell 4.4% year-on-year in first-tier cities, 5.2% in second-tier, and 5.7% in third-tier cities.

The central government lowered credit interest rates and minimum down payments recently to stimulate the housing market, while local governments implemented policy measures to encourage home sales, but these decisions have yet to influence the overall trend.

The slowdown in China’s real estate sector is affecting the cement and steel sectors. The housing market is much more critical in China than in other countries — the country’s economic model, social structure, and even political stability strongly depend on the housing sector.

The housing market plays a key role in the global economy, as it drives a significant portion of growth of many countries, while contributing to the construction sector, real estate investments, and mortgage loans.

Housing loans are one of the largest portfolio items in the banking system, and a potential bubble or crash in the housing market can cause serious fluctuations in the financial sector.

Excessive expansion post-2008 financial crisis causes problems

Said Kaymaz, an Asian markets analyst, told Anadolu that the modern Chinese housing market was formed in the 1990s and the market in cities grew rapidly in parallel with economic growth.

He noted that the Chinese government began massive fiscal and monetary expansion in 2008 after the global financial crisis, which affected the current administration’s view of the housing market today.

“Housing construction firms launched new projects to compete against each other due to the vitality in the market, as the prices were up — they recklessly borrowed and used large amounts of leverage while doing so, however,” he said.

Kaymaz said Chinese President Xi Jinping’s decision to take measures against speculation in the housing market in 2016 was the tipping point for the decline in the sector.

“Former vice premier and economist Liu He launched the deleveraging campaign in the sector, and these measures led to the cooling of the market, resulting in new issues, such as the Evergrande crisis,” he noted. “Real estate companies faced countless restrictions on new projects and financing initiatives.”

Kaymaz emphasized that the many measures introduced against speculative house purchases played a key role, as those wanting to buy a second or more homes weren’t allowed to access credit. Some cities like Beijing implemented measures so strict that it led to a significant decline in home purchases.

He mentioned that the Chinese real estate sector, alongside its indirect influence, made up nearly 30% of the country’s gross domestic product (GDP) in 2015.

“The government decided to allocate resources from the construction sector to sectors like electric vehicles (EVs), renewable energy, and semiconductors with its long-term plan in 2015,” he said. “Financial support wasn’t provided to real estate companies that were struggling, so long as they didn’t pose a systemic risk, but the slowdown in the economic activity due to real estate issues translated to the economy’s growth rate.”

“The (2021) Evergrande crisis especially accelerated the decline in housing prices, while the extremely strict measures and uncertainties during the pandemic prompted buyers to be more cautious; at the same time, Beijing’s insistence on not loosening credit conditions pushed prices down via liquidity — structural factors like the halt of the rural-urban migration, rising youth unemployment, and the slowdown in real income growth at the same time drove housing prices,” he added.

Housing sector remains not the priority

Kaymaz said policymakers view the real estate sector as an inefficient economic layer, not prioritizing it in resource allocation, but he argued that the sector’s “systemic importance” continues.

“The Communist Party of China’s leadership is taking measures to stabilize housing prices but these measures have yet to yield results, and they generally focus on stabilizing the market and cleaning up the balance sheets of indebted firms,” he said.

Kaymaz noted that the decline in housing prices accelerated in recent months, and that the market has been weak due to the economic downturn and weak household confidence.

“The sector’s share in influencing the Chinese economy, coupled with indirect sectors, fell to around 15%, while the share of high-value-added sectors like chips and EVs grew steadily and continuously over the past decade,” he noted. “A structural transformation is happening, but it is causing pain — we expect the decline in housing prices and the problems the sector faces to continue for at least a few more years.”

“The current administration is reluctant to provide financial support to the sector or to engage in monetary expansion to support it, but some academics say the stabilization of the housing market is fundamental to stimulate domestic consumption, calling for stronger support for the housing market,” he added.