Real estate sales in China go deeper than in 2008, S&P says:

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Most apartments in China are sold before the developers finish building them. Pictured here on June 18, 2022, are people selecting apartments in a development in Huai’an, Jiangsu Province, near Shanghai.

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BEIJING – New estimates from S&P Global Ratings suggest that real estate sales in China will fall more this year than during the 2008 financial crisis.

National real estate sales are likely to fall by about 30% this year — nearly twice as bad as their previous forecast, the rating agency said, citing a growing number of Chinese home buyers suspending their mortgage payments.

Such a drop would be worse than in 2008, when sales fell about 20%, Esther Liu, director of S&P Global Ratings, said in a telephone interview on Wednesday.

Since late June, unofficial counts have shown a rapid increase in Chinese homebuyers refusing to pay their mortgages on several hundred unfinished projects – until developers complete construction on the apartments.

Most homes in China are sold before completion, which generates a significant source of cash flow for developers. The companies have struggled to get financing for the past two years as Beijing cracked down on its high reliance on debt for growth.

Now the mortgage strike is hurting market confidence, delaying the recovery of China’s real estate sector until next year rather than this year, Liu said.

If house prices fall sharply, this could endanger financial stability.

As real estate sales fall, more developers are likely to find themselves in financial trouble, she said, warning that the drag could even spread to healthier developers “if the situation is not kept under control.”

There is also the potential for social unrest if homebuyers don’t get the apartments they paid for, Liu said.

Limited spillover outside real estate

Although the number of mortgage strikes increased rapidly within weeks, analysts generally do not expect a systemic financial crisis.

In a separate note dated Tuesday, S&P estimated that the suspended mortgage payments could affect 974 billion yuan ($144.04 billion) of such loans — 2.5% of China’s mortgage loans, or 0.5% of total loans.

“If there is a sharp fall in house prices, it could threaten financial stability,” the report said. “The government sees this as important enough to quickly roll out emergency funds to address the dwindling confidence.”

Chinese policymakers have encouraged banks to support developers and emphasized the need to complete the construction of apartments. Authorities have generally spoken out: more real estate support since mid-March, maintaining a mantra of ‘houses are for living in, not for speculating’.

“What worries us is that the scale of that support is not big enough to save the situation. [which] now changes to [a] worse direction,” said Liu.

But critically, Liu said her team does not expect a sharp fall in house prices as a result of local government policies support prices. Their projection is for a 6% to 7% decline in house prices this year, followed by stabilization.

And while S&P economists estimate that about a quarter of China’s GDP is directly and indirectly affected by real estate, only a portion of that 25% are at risk levels, Liu said, noting that the company has no specific numbers. on the impact of mortgage strikes on GDP.

A bigger problem to unravel

The Chinese real estate sector is intertwined with local governments and land use policies, making the sector’s problems difficult to solve quickly.

In an analysis published Tuesday, Xu Gao, director of the China Chief Economist Forum, pointed out that the amount of residential space completed has not grown on average since 2005, while the amount of land sold has declined on average during that time.

The contraction contrasts with the rapid growth in both land areas sold and homes completed before 2005, when a new land bidding process went into full effect, he said. The new bidding process tightened the supply of land and real estate, pushing home prices up more than speculation did, Xu said.

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Investors should consider only the best developers among China’s high-yield real estate debt, Goldman Sachs said in a report on Tuesday. “We’re seeing relative value in their lower-priced, longer-term bonds.”

But overall, it’s a story of uncertainty in one of China’s biggest sectors.

“For us, the ongoing tensions in the real estate sector coupled with the uncertainties related to COVID measures suggest a bleaker outlook for China,” wrote credit strategist Kenneth Ho.

One possible scenario he outlined is one where credit concerns remain high, but without any real systemic problems, creating a negative overhang on investor sentiment in the high-yield credit markets.

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