S&P Global Ratings believes China’s property sales will fall even further this year than during the 2008 financial crisis.
According to a new prediction from ratings agency, sales of national property will drop by approximately 30% this year — almost twice the forecast in its original predictions. The decreased value is due to a larger number of mortgage holders who have defaulted on their loans and properties in China.
According to Esther Liu, director of S&P Global Ratings, said in a phone interview Wednesday that a 20% drop would be worse than in 2008.
There have been a rapid increase in Chinese homebuyers refusing to pay their mortgages across more than a few hundred uncompleted projects in recent months, until developers complete construction on the apartments.
Since homes in China are often sold before they are completed, it provides an important source of revenue for developers. Over the past two years, businesses have had difficulty obtaining financing as Beijing cracked down on their high reliance on debt.
As per Liu, currently, the mortgage strike is harming market confidence, preventing China’s real estate market from recovering until next year rather than this year.
She warned that as property sales drop, more developers may fall into financial trouble, warning the drag could even spread “if the situation is not contained.”
If homebuyers do not get what they are promised in the purchase of an apartment, there is a possibility for riots and civil unrest, Liu said.
Spillovers outside of the real estate sector are limited
Though the number of mortgage strikes spiked suddenly in the last few weeks, analysts do not expect a general economic meltdown.
S&P said the mortgage payments suspension might affect 974 billion yuan ($144.04 billion) of such loans in a separate note on Tuesday. This would represent 2.5 percent of Chinese mortgage loans or 0.5 percent of all loans.
“If there is a sharp decline in home prices, this could threaten financial stability,” according to the report. “The government views this as important enough to quickly roll out relief funds to address eroding confidence.”
In response to current pressures on Chinese policymakers, they are now asking banks to finance new housing development, as they see as crucial. Since mid-March, authorities have usually shown increased support for real estate, while continuing to emphasise “houses are for living in, not speculation.”
“What worries us is the scale of those support is not big enough to save the situation, [which] now turns to [a] worse direction,” Liu stated.
But crucially, Liu stated that because of local government strategy to sustain prices, her team does not anticipate a big decrease in property prices. According to their forecast, housing values would drop by 6 to 7 percent this year before stabilising.
While S&P economists believe that real estate affects around a quarter of China’s GDP directly and indirectly, Liu said that only a portion of that 25% is at a risk level and that the company lacks detailed data on the effect of mortgage strikes on GDP.
Unraveling a bigger problem
Local governments and land use policies have complicated China’s real estate industry, making it harder to resolve its problems quickly.
The director of the China Chief Economist Forum, Xu Gao, said in a report released on Tuesday that while the amount of land sold has generally decreased since 2005, the amount of residential floorspace finished annually hasn’t increased on average since that year.
Before 2005, when a new land bidding process completely went into force, there was fast development in both the amount of land sold and the number of completed homes, he added. This shrinkage contrasts with that rise. Using the new bidding process, supplies tightened and this contributed to the rise in housing prices more than the speculation in the housing market did, Xu said.
Goldman Sachs stated in a report on Tuesday that investors should only take into account the finest developers among high-yield China real estate loans. “We see relative value in their lower dollar priced longer duration bonds.”
A large part of China’s economy is in uncertainty as a result of this report.
“To us, the continued stresses in the property sector coupled with the uncertainties related to COVID measures suggest a murkier outlook for China,” Kenneth Ho, a credit strategist, wrote.
He suggested a scenario in which credit fears persisted but there were no significant systemic issues, which would have a detrimental impact on investor sentiment on high-yield credit markets.
