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Will China’s real estate sector return to growth path? Oxford economist answers

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Moody’s expects China’s GDP to slow to 4% growth in 2024 and 2025 and average 3.8% a year from 2026 to 2030

China, whose real estate sector has been in a bloodbath mode since the outbreak of the COVID-19 pandemic, will take years to make a strong rebound, stated Oxford Economics lead economist Louise Loo.

Loo, while looking at the pan-China data, be it the official estimates of unsold property inventory or the construction-to-sales ratio, found that it would take at least four to six years for the real estate developers in the world’s second-largest economy to complete unfinished residential projects.

“That means efforts to boost funding to developers and other efforts to resolve China’s property market problems don’t directly address the bigger issue of uncompleted homes,” Loo’s research stated, as reported by CNBC.

“However, as one slices the data, the existing excess supply in the market is likely to take at least another four years to unwind, absent a meaningful pickup in demand,” Loo commented further in her study.

“Increasing supply coming from secondary market transactions – as households, worried about depleting profits from price declines, sell their second or third homes – is an additional drag to this process,” she said further, while noting that “developers’ inventory is far too large for households to absorb quickly.”

What does the study suggest?

Loo’s study noted that apartment homes in China were typically sold ahead of project completion, thereby putting pressure upon the real estate developers to finish their construction activities on time.

“However, financing struggles and other issues have meant developers have had to delay home delivery times — discouraging future home sales. On the extreme end, residential construction in the relatively poor province of Guizhou could take well over 20 years to complete,” Loo said further.

While China’s real estate and related sectors used to account for about a fifth to one-fourth of the country’s economy during the pre-COVID times, rating agency Moody’s now expects that figure to decline.

The firm also stated that the drop in land sales will result in the local governments facing financial strain.

“That means Beijing may need to step in, posing downside risks to China’s fiscal, economic and institutional strength,” Moody’s noted, while downgrading its outlook on Xi Jinping government’s credit ratings to negative from stable.

Moody’s also expects China’s GDP to slow to 4% growth in 2024 and 2025 and average 3.8% a year from 2026 to 2030. The firm, however, maintained an “A1” long-term rating on the country’s sovereign bonds.

No Spillover Risk

Loo does not see China’s property market troubles as having a significant spillover to the rest of the country’s economy.

“We think China’s housing downturn will tread a different path than that of the US, Spain, or Ireland 10-15 years ago, and is unlikely to trigger a broader financial crisis,” she remarked in her study.

While pointing out that falling house prices, mortgage failures and bank lending were interlinked, Loo said that in China, government policies, state-controlled banks and more stringent mortgage terms would ensure that the property crisis doesn’t become a drag for the overall economy.

Agreeing with Loo, S&P Global Ratings said, “We do see some similarities between China’s situation and the economic stagnation in Japan after the latter’s property bubble burst in 1991. However, China can avert this outcome, helped by regulatory action and the strength of its banking and corporate sectors.”

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