China’s property market is facing a severe downturn, with new home prices falling at an unprecedented rate. In May, prices dropped by 0.7%, marking the sharpest monthly decline since 2014. This ongoing decline has raised significant concerns about the broader economic implications for the country.
Record Decline in Home Prices
According to the National Bureau of Statistics (NBS), new home prices in China dropped by 0.7% month-on-month in May. This represents the steepest monthly fall since October 2014. Despite government efforts to stabilise the market, prices have declined consistently for eleven months.
Impact on Second-hand Homes
Second-hand home prices also saw a significant drop, falling by 1% month-on-month. This is the largest monthly decrease since 2011. Non-new build property prices have fallen 12.3% from their peak in 2021. The downturn in the property sector is a key concern for economic stability.
Government Intervention and Challenges
Despite various government measures, including a substantial stimulus package announced in May, the housing market continues to struggle. The government has cut mortgage affordability restrictions and established a £33bn re-lending fund to help local governments buy unsold stock and convert it into affordable housing.
Lynn Song, chief economist for Greater China at ING, noted that these figures “ring some alarm bells,” as policymakers have been unable to stabilise the market. “This data further indicates that the property sector will remain a headwind on growth this year,” Song added.
The Evergrande Effect
China’s property market woes began to deepen following the collapse of real estate giant Evergrande at the end of 2021. The company’s downfall has had a ripple effect across the sector, heavily impacting the broader economy as property development once accounted for a fifth of China’s GDP.
Despite government interventions, challenges persist, and the market remains unstable. Duncan Wrigley, chief China economist at Pantheon Macroeconomics, suggested that the measures taken may not be sufficient.
He pointed out that the re-lending facility may not support enough funding for local governments to buy up inventory. Wrigley also warned that property prices have “yet to bottom out,” indicating a continued period of volatility.
Declining Demand
The significant drop in new home sales last year, a 27.9% decline, reflects the challenges in the housing market. This substantial decrease in demand has been difficult to counteract despite various easing measures.
Goldman Sachs economist Yuting Yang anticipates further government support in the coming months, including additional reductions in mortgage interest rates. However, Yang cautioned that these measures might not lead to a quick recovery.
“Considering persistent property weakness related to lower-tier cities and private developers, such easing measures may only lead to an ‘L-shaped’ recovery in the sector,” Yang noted in a statement to investors.
Broader Economic Implications
The decline in property prices and sales highlights broader economic challenges for China. As Beijing grapples with these issues, further policy interventions may be necessary to prevent a deeper economic slowdown.
The property sector’s downturn is a significant concern for China’s overall economic health. With the real estate market playing a crucial role in the country’s GDP, prolonged instability could have lasting effects.
As the government considers additional measures, the effectiveness of these interventions will be closely watched by analysts and investors alike.
Future Prospects
Analysts are keeping a close eye on the situation, expecting more government interventions to stabilise the market. However, there remains scepticism about the efficiency of these measures given the persistent decline.
With housing affordability and demand in lower-tier cities remaining low, the road to recovery seems uncertain.
The sharp decline in China’s property market highlights significant economic challenges. Despite various government measures, the housing sector’s instability persists. Further interventions may be necessary to stabilise the market and prevent a deeper economic impact.
