Outlook of China’s economy gloomy due to real estate market crash

The world's second-largest economy is going through a rough patch due to worsening real estate crises since prices and investments in the sector are declining since August, 2022.
 
The economy of China narrowly escaped a contraction in the second quarter of this year. The property sector, meanwhile, has lurched from crisis to crisis since 2020 after regulators stepped in to cut excess debt at developers.
 
China’s economy has been gradually going downhill since April 2020 after a respectful first quarter outcome, when GDP grew by 4.8% year on year. The country’s GDP expanded by just 0.4% in the second quarter, due to factors including COVID-related lockdowns in major cities and setbacks in the real estate sector. 
 
Complications in China's property market worsened in August, with official data showing home prices, sales and investment all falling, as a mortgage boycott and developers' financial strains further hurt confidence in the sector.
 
Hundreds of thousands of homebuyers are refusing to pay their mortgages for pre-sold properties as developers struggle to complete housing projects on time.
 
According to calculations by Reuters based on National Bureau of Statistics (NBS) data, New home prices resumed their month-on-month decline in August down by 0.3%.  This was worsened by weak demand in smaller cities amid persistently slow deliveries by heavily-indebted developers. 
 
More significantly, prices extended their year-on-year contraction for the fourth month in August, with prices last month falling 1.3%, the fastest annual pace in seven years, and suggesting longer-term homebuyer aversion.
 
Zhang Dawei, a chief analyst at property agency Centaline has told Reuters that the real estate sector is still in the process of finding its cause.
 
In order to ease the impact of the crisis situation, the Chinese authorities have taken a number of decisions including relaxations on home purchases, smaller down-payments, cuts in mortgage interest rates and a bigger reduction in the selling price of homes. 
 
Zhang said he expected Chinese authorities to roll out more measures in tier-one cities such as Beijing and Shanghai and tier-two cities to stabilise the market and restore buyers' confidence in the near term.
 
Confidence in the sector has been dampened by a mortgage boycott across the country since late June as developers stopped building presold housing projects due to strapped liquidity and strict COVID restrictions. 
 
Today, China still has one of the most strict COVID-19 restrictions as well as frequent lockdowns in that country.
 
A sign of economic trouble is a fast spread of mortgage boycotts in July, involving projects in 26 provinces and municipalities, raising fear of possible broad risk in the financial sector. 
 
Separate data from the statistics bureau on Friday showed property sales declining for a 13th consecutive month in August.
 
Property sales by floor area dropped 22.58% year-on-year, according to Reuters calculations based on the NBS data, the sixth month in a row it suffered double-digit falls. Sales tumbled 23.0% year-on-year in the January-August period.
 
After the data releases, the CSI Real Estate Index (.CSI000952) on mainland stock markets fell 1.73%. The Hang Seng Mainland Properties Index (HSMPI) in Hong Kong declined 0.73%.
 
Month-on-month price falls spread to more cities in August, with unfinished projects across China increasingly a longer-term drag on sentiment.
 
Out of the 70 cities surveyed by NBS, 50 reported price falls in August, up from 40 cities in July.
 
Home prices dropped 0.2% and 0.4% in tier-two and tier-three cities respectively, official data showed.
 
Meanwhile, regional head of research at ING group Robert Carnell said, “It will take some time for the pool of unfinished property construction projects to be completed with local government support for developers, and in turn, for Chinese households to consider investing in property in scale again.”
 
Investment dropped 13.8% year-on-year in August after slumping 12.3% in July. It shed 7.4% in the January-August period.
 
Meanwhile, the risk is increasing that the funds and liquidity are idling within the financial system, due to deterioration of credit demand from the real estate sector. 
 
The short-term bill financing of the four state-owned banks and national large banks rose by 148.0% and 102.7% year on year in July 2022, while the growth rate of short-term and long-term loans from these banks declined. In the same month, the growth of loans has also significantly softened (negative) for the small and medium banks, indicating further weakening of credit demand by small- and medium-sized enterprises.
 
In the coming months, the Chinese Government has to come up with more funding to help reverse the economic downturn in recent months. The fiscal injection from the central bank’s profit submission will be depleted soon, and the quota for local government bond issuance will be used up shortly. 
 
Meanwhile, according to ratings agency Fitch said China’s real estate troubles could spill into other major sectors if the problems persist — and three particular businesses are most vulnerable, 
 
“If timely and effective policy intervention does not materialise, distress in the property market will be prolonged and have effects on various sectors in China beyond the property sector’s immediate value chain,” Fitch analysts said in a report released on Monday.