The Rising Influence of Rising Affluence

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China’s real estate sector goes south

https://www.eastasiaforum.org/2022/10/18/chinas-real-estate-sector-goes-south/

Housing prices are falling in more than half of China’s cities. New home sales are also plummeting, dropping 23 per cent year-on-year as of August. A drop in pre-sales is important because they account for 86 per cent of Chinese developers’ funding.

Chinese developers are excessively dependent on household financing by international standards. That is a direct consequence of the ‘three red lines’ enforced by Chinese regulators in 2020, prohibiting banks from extending additional lending to developers.

As housing units are left unsold, developers prefer not to invest in new projects. This has a chain effect on related sectors such as construction materials, household appliances and furniture. Fixed asset investment in the real estate sector accounts for one-third of China’s total fixed asset investment, directly affecting growth. The weaker demand for other related sectors also adds to the impact of the real estate demise on GDP growth.

The situation is bad news for financial stability, particularly for banks. Banks are less exposed to developers than mortgages, as banks are not allowed to be heavily exposed to developers. Mortgages account for 11 per cent of banks’ assets, well above their 4.5 per cent of direct exposure to real estate developers. That is why mortgage boycotts — especially if they are extended — are a bigger problem for the asset quality and solvency of banks.