China’s real estate sector managing slowdown: IMF
WASHINGTON: 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. This reliance has, however, been accompanied by the buildup of significant risks, according to a report by International Monetary Fund.
Home prices became significantly stretched relative to household incomes in the decade before the pandemic, in part because consumers preferred to invest their 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. More recently, the authorities have appropriately focused on containing risks and helping the sector transition to a more appropriate and sustainable size. They 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, and most recently the authorities have aimed to boost rental housing, expand affordable housing, and upgrade under-developed urban neighborhoods.
With the property downturn in its third year, progress in downsizing the sector has been rapid in some respects. Housing starts have fallen by more than 60 percent relative to pre-pandemic levels, a historically rapid pace only seen in the largest housing busts in cross-country experience in the last three decades. Sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future.
At the same time, key property sector vulnerabilities have yet to be addressed, pointing to ongoing risks to sustainability. 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 also decreased only modestly in part because some cities have sought to limit price declines through rules and guidance on listing prices. China’s housing market faces additional pressures in coming years from structural factors, 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 of people move to newer housing from older buildings lacking modern amenities.