China’s real estate market is bracing for a protracted period of adjustment, with the surplus of unsold homes expected to take over a decade to resolve, says Hao Hong, the chief economist and partner at GROW Investment Group.
Speaking on CNBC Street Signs Asia, Hong highlighted, “If you look at the inventory overhang situation — at this sales rate — it will take about two years to clear all the inventory that is outstanding in the market.”
He continued, “And then if you look at the property under construction, we have 6 million square meters under construction. At this rate, it will take probably more than 10 years to clear all those housing under construction. So, all in all, we’re talking about multi-years in terms of correction.”
The slow growth in home sales and stagnant prices have been exacerbated by a debt crisis among real estate developers, triggered in 2020 by Beijing’s efforts to reduce leverage in the sector—a significant part of China’s economy, influencing nearly a third of its economic activity directly and indirectly.
Beijing’s “three red lines” policy, which limits developers’ borrowing based on cash flow, assets, and capital, has seen major firms like Evergrande and Country Garden face significant challenges.
Hong suggests that the market needs to adjust to a longer timeline for resolving the excess inventory and seek new avenues for economic growth beyond just real estate investment. He noted that the enduring nature of this property correction has surprised many market observers.
Historically, the property sector has rebounded quickly from downturns, but Hong believes, “This time around, it seems to us that the property sector has peaked and the long cycle is coming down. As a result, because the market is not ready for a long term correction — they are more accustomed to a quick rebound, according to past experience — the market is caught off guard”
Despite numerous support measures, the ongoing real estate crisis has dented consumer confidence and put pressure on China’s broader economic performance, sparking debate over the need for more robust stimulus to prevent a deeper economic slowdown.
In response, Chinese officials at the Central Economic Work Conference in December vowed to address risks in the real estate sector, local debt, and financial institutions, while emphasizing the importance of high-quality development. They outlined a nine-point strategy focusing on technological innovation, stimulating domestic consumption, attracting high-level foreign investment, and enhancing food security through agricultural revitalization.
Additionally, the People’s Bank of China announced in December the provision of 350 billion yuan ($49 billion) in loans to policy banks, marking the first monthly increase since November 2022. This move, aimed at bolstering the economy during the Covid-19 pandemic, has raised expectations of further support for infrastructure and the struggling housing sector to foster economic growth.
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