Chinese developers are currently grappling with significant challenges in offloading new home sales. This struggle persists despite a notable rebound in second-hand transactions in major cities.
In Shenzhen, new home sales in June witnessed a 4% decline compared to the previous year. This drop comes even after the government relaxed measures to stimulate the market.
According to Midland Realty, developer inventory remains high, contributing to the polarized results between new and existing apartment sales.
Similarly, new property sales underperformed in Beijing compared to existing ones in June, as noted by Centaline Group analyst Zhang Dawei.
Buyers’ Caution Towards New Apartments
Homebuyers in China’s first-tier cities remain cautious about purchasing new apartments. These units are often priced higher or located in suburban districts, which leads to a divergence in market recovery.
This caution underscores the challenges faced by cash-strapped developers who are relying on a sales revival to alleviate liquidity pressures.
Zhang Hongwei, founder of Jingjian Consulting, which advises real estate companies, stated, “Homebuyers prefer cheaper used dwellings in urban zones with plenty of shops, schools, and hospitals nearby.” He added that new property sales might weaken further in late July.
Economic Impact of Weak New Home Sales
The weakness in new-home sales is a hindrance to China’s economic recovery, which is projected to fall short of the government’s 5% growth target for this year.
Although the slump in sales from China’s 100 biggest developers narrowed last month, June transactions remained low, as reported by China Real Estate Information Corp.
Government Measures to Stimulate the Market
Economists are forecasting that the central government will introduce new measures to bolster the market. Top policymakers have urged officials to be more “creative and bold” in implementing supportive measures.
This is in addition to China releasing 300 billion yuan ($41 billion) of central bank funding to help government-backed firms purchase excess inventory from real estate companies.
Despite these efforts, the recovery in second-hand homes provides some relief for owners looking to cash out.
Rebound in Second-Hand Home Sales
In June, the sale of existing residential properties in Shenzhen soared to the highest monthly level in over three years, exceeding expectations, according to Midland Realty.
Similarly, second-hand home sales in Shanghai and Beijing reached the highest levels in almost three years and 15 months, respectively, as per official and Centaline data.
In Shanghai, about 70% of used properties sold were urban, rundown residences priced below 4.5 million yuan, according to Zhang from Jingjian Consulting.
Divergence in Market Recovery
The divergence between the recovery of new and second-hand home sales highlights the challenges faced by developers.
New home sales are lagging, causing concerns about the overall economic recovery. The preference for second-hand homes in prime urban locations over new properties in suburban areas is evident.
This trend is driven by buyers’ preference for affordability and proximity to amenities such as shops, schools, and hospitals.
Broader Implications for the Housing Market
The current crisis in China’s housing market has broader implications beyond just new home sales. The divergence between new and second-hand home sales is reflective of deeper structural issues within the market.
For instance, the urban-rural divide plays a significant role in buyer preferences. Urban areas with better infrastructure and amenities are more attractive to buyers, leading to higher demand for second-hand homes.
Conversely, suburban areas, where most new developments are situated, are less appealing due to fewer amenities and longer commutes.
Impact on Developers and Construction Industry
The ongoing crisis is putting immense pressure on developers and the construction industry. With high levels of unsold inventory, developers are facing liquidity issues, making it difficult to finance new projects or even complete existing ones.
This is leading to a slowdown in construction activities, further exacerbating the economic slowdown. The construction industry, which is a significant employer, is also feeling the pinch as projects get delayed or halted due to financial constraints.
Financial Sector at Risk
The financial sector is not immune to the housing market crisis. Banks and other financial institutions that have significant exposure to the real estate sector are at risk.
Non-performing loans (NPLs) in the real estate sector are likely to increase as developers struggle to service their debt. This could lead to tighter credit conditions, making it even more challenging for developers to secure financing.
The ripple effect could extend to other sectors of the economy, leading to a broader financial crisis if not managed properly.
Potential Solutions and Government Intervention
To address the crisis, the Chinese government is expected to implement a series of measures aimed at stabilizing the housing market.
This includes financial support for developers, measures to boost buyer confidence, and policies to make housing more affordable.
The government’s recent decision to release 300 billion yuan ($41 billion) of central bank funding is a step in this direction.
However, more comprehensive measures may be needed to address the root causes of the crisis and ensure a sustainable recovery.
Role of Policy Reforms
Policy reforms aimed at reducing the urban-rural divide and improving infrastructure in suburban areas could help address the underlying issues in the housing market.
By making suburban areas more attractive, the government could help balance the demand between new and second-hand homes.
Additionally, policies that promote affordable housing and provide financial incentives for first-time buyers could help stimulate demand for new homes.
Future Outlook and Predictions
Looking ahead, the outlook for China’s real estate market remains uncertain. Analysts and economists are closely watching the government’s next steps to support the market.
With the central government’s push for new measures and the recent funding to help with excess inventory, there is hope for some stabilization.
However, the recovery of new home sales will likely depend on broader economic conditions and buyer sentiment toward property investments.
Conclusion
China’s real estate market is facing a new crisis as developers struggle to offload new home inventory. While second-hand home sales are rebounding in major cities, new property sales continue to underperform.
This trend is causing a divergence in the market recovery, posing significant challenges for developers and the broader economy.
As the central government considers additional measures to support the market, the future of China’s real estate sector remains uncertain.
The preference for affordable, well-located second-hand homes over new properties in suburban areas underscores the complexity of the market recovery and the need for innovative solutions to address the current crisis.
Addressing the current crisis requires a multi-faceted approach that includes financial support for developers, policy reforms to make suburban areas more attractive, and measures to boost buyer confidence.
With the right interventions, it is possible to stabilize the market and pave the way for a sustainable recovery. However, the path forward is fraught with challenges, and careful management will be crucial to avoid further exacerbating the crisis.