Caixin
Nov 18, 2021 09:25 PM
ECONOMY

Roundup: What to Expect From China’s Property Market in 2022

China’s property sector has been a major driver of the country’s remarkable economic and household wealth growth over the past 20 years, but it has appeared to have lost its shine in recent months amid market turmoil such as developer defaults, and dipping property sales and prices. This has led to waning confidence among investors and homebuyers.

Although regulators and some local governments have begun offering reassurance to developers, investors and homebuyers, observers are still worried about risks to the macroeconomy and financial system given the sector’s extensive links to other industries.

Here is a roundup of viewpoints from analysts on how the troubles started, what is the impact and where the market will go.

 

How the property market arrived at this state

Analysts generally agreed that the current property turmoil was a culmination of many property firms’ fast expansion through highly leveraged borrowings over the past decades, triggered by regulators’ stronger deleveraging campaign since last year aimed at curbing property speculation.

In addition, some local governments’ tightened oversight on property developers’ presale revenues to ensure they were meant strictly for construction, resulting in some developers feeling even higher liquidity pressure. Local authorities did so to protect homebuyers from abuse of funds by debt-ridden developers.

• Despite generally tight property policy over the past several years, China’s housing prices continued to grow, real estate investment stayed strong, and developers’ debt risk increased. Therefore, China has announced new property regulation rules since mid-2020, which possibly exacerbated the already-existing debt issues of some higher gearing developers, including China Evergrande Group.

— UBS Investment Bank

• The property sector is caught in a negative credit loop: limited funding access has reduced liquidity for developers. Developers, especially financially weak ones, reduced spending on land and construction to preserve liquidity for debt servicing. Severely constrained funding access and tightened bank control over project-level cash for a few financially weak developers limited their ability to manage their cash flow and caused them to default. Sales have declined across the sector because of developers’ constrained spending and homebuyers’ concerns over completion risks. Investors’ and lenders’ risk aversion has increased in response, exacerbating refinancing risk, particularly for small and financially weak developers.

— Moody’s Investors Service

• When the regulation was suddenly tightened, the actual cash available to real estate enterprises would be significantly smaller than planned, putting them under liquidity pressure. The stricter the enforcement of presale funds regulation, the greater the liquidity pressure.

— Essence Securities

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Shock to China’s economy

Economists are worried that the cooling property market is dragging down China’s recovery from the Covid-19 pandemic, given its significant impact on economic activities including investment, production and consumer spending. Some warned of the risks to the financial system because defaults and possible bankruptcies will result in rising bad debts.

They also warned that some local governments will find it harder to make ends meet because of property firms’ reluctance to purchase land amid a liquidity crisis. Land sales are a key funding source for local authorities, and a drop in sales would weigh down on public spending.

• Smaller cities have borne the brunt from the ongoing property sector worsening. The rapid weakening in the property sector in October bodes poorly for GDP growth and government revenue in coming months.

— Nomura International (Hong Kong)

• Real estate investment in the first half of next year will probably drop year-on-year, which will mean obvious pressure on the economy as it is equivalent to 13.5% of GDP. If taking into account its indirect contribution through driving up services and consumption, the share may exceed 20%.

— TF Securities

• We expect growth in local government income from land sales to slow in 2021 overall and to contract in 2022. Provinces with both a high reliance on land sales and high debt burdens will face fiscal pressure with a widening funding gap. The shortfall in local government financing will also constrain funding for infrastructure which will weigh on economic growth, intensify the policy dilemma between supporting growth and deleveraging.

— Moody’s Investors Service

• Financial institutions’ lending to property developers is backed by land, but under downward market pressure, land value could decline, thus raising lenders’ bad loan levels. Meanwhile, homebuyers may fail to receive their homes in a timely manner. The real estate risks could exacerbate the risks of small and midsize companies along the value chain and even bring about a wave of bankruptcies among them, resulting in large-scale joblessness.

— China Chengxin International Credit Rating

What is next for the property sector

Many analysts believe the worst may be yet to come for China’s property market as they expect continuous cooling of investment, construction and sales over the coming months. Some property firms could also continue to struggle to pay bills.

As regulators have begun fine-tuning property policies, analysts largely forecast that they will continue easing curbs on things such as mortgage issuance to prevent contagion risks to the economy. But they do not think there will be a sharp reversal of the long-term policy stance to curb property speculation.

 

Some economists said local governments’ tightened oversight on developers’ presale revenues may bring about headwinds to state departments’ property policy easing, and their limitations on price discount would be a distortion. Some economists also said the planned pilot property tax reform could bring about short-term pains to the chosen cities.

• We expect the real estate slowdown to be significant but to be contained. Unlike the start of the 2014-15 property downturn, the stock of unsold housing hanging over the market is modest. What’s more, policymakers have scope to ease property sector policies to prevent the downturn from turning uncomfortably intense. In the medium-term, we expect a gradual retrenchment of the property sector. While a relatively high proportion of empty apartments is weighing on the market, we expect urbanization and significant income growth to help reduce the risk of a more drastic retrenchment.

— Oxford Economics

• Although we believe Beijing has a much higher pain threshold than in previous tightening cycles, there are still limits to what Beijing is willing to tolerate. Beijing may significantly ramp up monetary easing and fiscal stimulus from as early as December and January to counteract what we expect to be worsening downward pressures. Beijing might also dial back some of its property curbs. Still, we expect Beijing to maintain some of the major curbs.

— Nomura International (Hong Kong)

• We forecast a 10% drop in residential sales in 2022. This trend should continue into 2023, where we project another 5% to 10% decline. Sliding unit sales and an up to 3% drop in prices will drive the downturn. Some local governments are starting to set price floors on residential sales as regulators seek to stabilize the market.

We believe regulatory measures restricting borrowing for mortgages and capital for developers will last at least through 2022. Officials will fine-tune their measures to avoid a drastically adverse effect, in our opinion. This may include making mortgages more available.

— S&P Global

• Policymakers could remain patient for a while, but they would take actions later to contain contagion risks in the property sector when things get bad enough. For instance, they could ease the controls on presales money, or modify the definition of the three-red-line regulations. But that’s just fine-tuning in liquidity measures, not a change in policy direction, which would stay with a tightening bias. For property loosening, policymakers would wait till next year, when they might have to defend the 5% GDP growth bottom line.

— Macquarie Capital

• Although the real estate market is currently facing great credit risks and liquidity pressure, it is not advisable to be overly pessimistic. The change in policy tone is ongoing. Although it will take some time for the policy change to be reflected in market indicators, it is quite certain that the market will bottom out next year.

— Citic Securities

• Near-term pains caused by the pilot property tax reform are inevitable. Although authorities will cautiously proceed with the tax reform and only gradually phase in the tax, the launch of the reform would rein in market speculation and home prices.

— Nomura International (Hong Kong)

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Bertrand Teo (bertrandteo@caixin.com)

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