The future of China’s real estate market remains uncertain, depending on economic factors, policy interventions and market sentiment
- Beijing faces the uphill task of regaining trust among stakeholders in the property market, including developers, investors and homebuyers
- Despite incremental steps to revive the market, the outlook remains tepid with state-owned developers poised to reshape the post-crisis landscape
- The future of China’s property market remains uncertain, with the delicate interplay of economic factors, policy interventions and market sentiment shaping the course ahead
China’s property sector as we know it today began to take shape in the late 1990s following the economic reforms of the 1970s. Prior to this properties were owned and distributed by the state. The market underwent a significant surge in the early 2000s due to rapid urbanisation and an expanding middle class. Government intervention came into play to address speculative bubbles and rising property prices.
Nevertheless, the property sector continued to expand and emerged as a crucial pillar of China’s economy, contributing 13% of GDP in 20221. The sector’s evolution from a state-controlled system to a dynamic, market-driven industry is noteworthy. The government’s regulatory role remains vital as it seeks to balance economic growth, address social concerns and ensure stable, sustainable development in the housing sector.
The rapid expansion of the property sector led to substantial funding requirements (Figure 1). In addition to bank loans, developers turned to offshore funding due to strict controls on onshore bonds, particularly during market overheating. Moreover, funds raised onshore – whether through loans or bonds – were not permitted for land acquisitions. The appeal of global dollar bonds was heightened by crackdowns on shadow banking. Debt accumulated as Chinese developers frequently sought refinancing, resulting in annual sales of such bonds surging from US$675 million in 2009 to $64.7 billion in 2020, constituting around a quarter of China’s USD corporate bonds2.
Figure 1: offshore bond issuance and total property sales
Source: National Bureau of Statistics/Bloomberg, 2023
Figure 2: defaulting Chinese developers
Source: Bloomberg and company filings, 2023
The containment measures for Covid-19 in China exacerbated the crisis. Contracted sales dwindled due to incomes declining, quarantine-related property viewing restrictions and concerns among homebuyers about the delivery of pre-sold properties. By mid-2022 a growing number of projects were delayed or stalled due to developer cash shortages, triggering a significant mortgage boycott across multiple cities.
Social unrest prompted the government to intervene and introduce relaxation measures starting from November 2022. These aimed to enhance developers’ access to loans, bonds and equity financing and offered flexibility in mortgage rates, reduced downpayment ratios and even lifted house purchase restrictions in select cities. Aimed at prioritising social stability, the government focused on ensuring property delivery through strictly managed third-party escrow accounts and a CNY200 billion special fund. This further worsened developers’ liquidity pressure, despite successfully boosting more home completions in the first half of 2023 among both good quality and distressed developers (Figure 3).
Figure 3: home completions among Chinese developers
Source: JP Morgan, July 2023
After China’s reopening in early 2023, property sales briefly rebounded before declining again. Sluggish contracted sales proved to be a challenge for developers. The crisis extended to higher-quality firms including Country Garden, the country’s largest developer by sales. Conversely, state-backed developers benefited from increased market share given stronger homebuyer confidence in property delivery. By the end of July 2023, state-backed developers held three-quarters of the market share, having gained nearly 30% from private-owned developers since 20216.
Beijing’s challenge now revolves around restoring confidence among homebuyers, investors and developers themselves. Some developers might have the capacity to service their debts but choose not to due to bleak recovery prospects. Meanwhile, housing demand is hindered by a lack of confidence in property delivery, price expectations, and employment/income outlook.
So a turnaround in the property market remains elusive despite incremental easing measures, including mortgage rate cuts, lower downpayment ratios and selective relaxation of house purchase restrictions. This long-waited easing phase has proved less effective due to significant defaults among developers and a subdued economic outlook.
Looking ahead we can expect further marginal easing measures, such as the recent rate cut on existing mortgages. Sentiment will fluctuate based on whether policy actions meet expectations, but the overall outlook remains weak until there is a turnaround in either property sales or funding access. State-owned developers are poised to dominate the post-crisis landscape, while private-owned developers may operate on a smaller scale or even face elimination. This transition could lead to a gradual shift toward a residential property market with an increasing share of affordable and rental housing.