While short-term relief will help, the government should also rethink zero-Covid policies that are depressing the China housing market.
Published in Bloomberg on 28 July 2022 – 7.30 am
In dozens of cities across China in recent weeks, middle-class homeowners have launched protests, furious that construction has stalled on apartments for which they’re already shelling out mortgage payments. The government has moved quickly to head off an immediate crisis. But it needs to do more to address the deeper problems weighing down China’s housing market.
Struggling private developers, including debt-laden China Evergrande Group, are the main focus of buyers’ anger. Burdened by slumping prices and a government crackdown on overleveraged companies, several haven’t been able to come up with the cash to complete scheduled projects. More than 70% of Chinese homes are sold before construction is finished; homeowners with mortgages start paying long before they receive keys. After one group of buyers in central China threatened last month to withhold payments if construction on their homes didn’t resume, similar boycotts began to spread.
Authorities appear to have been taken aback by the unprecedented nature of the protests — after putting as much as 30% down on homes, buyers have good incentive to keep up their payments — and by how quickly they’ve multiplied. Strikes encompassed nearly 320 projects in about 90 cities by July 22, even as government censors made it harder to track the phenomenon. The mortgages involved may be worth as much as $297 billion. Some suppliers, too, have threatened to stop paying their bank loans unless Evergrande first pays them what they’re owed.
Analysts have downplayed the short-term financial risk of the boycotts; DBS Group says that China’s banking system can absorb $1.1 trillion in losses before falling into crisis. Still, authorities clearly don’t want to see protests spreading any further, possibly even to existing homeowners angry about the declining value of their properties.
Their top priority must be to restore confidence by finishing stalled projects. The government has encouraged banks to increase lending for that purpose, a reasonable first step. One provincial capital has established a bailout fund for developers; property stocks rallied after a report that the central government planned its own rescue fund. Further measures may be needed, including allowing some buyers to pause mortgage payments until their homes are completed.
At the same time, the boycotts are merely a symptom of a larger problem. Stricter enforcement of rules meant to rein in leverage have put pressure on developers such as Evergrande, several of whom have defaulted since last year. Uncertainty over their prospects has combined with uncertainty over the pandemic to dampen sentiment among buyers, leading to a decline in sales. The slump has taken a heavy toll not only on developers’ cash flows but on the broader Chinese economy: It’s the main reason growth slowed to a shocking 0.4% in the second quarter.
It’s hard to see how the government can halt the slide as long as it maintains its strict zero-Covid policy. Buyers facing constant testing and the ever-present threat of lockdowns, especially with the spread of more transmissible omicron sub-variants, simply don’t have the confidence to invest their life savings in property right now. Expectations of future income and employment have plummeted.
If China’s leaders can’t simply abandon the policy — for political reasons, but also because of low levels of vaccination among the elderly and limited critical-care beds — they might at least change the goal from zero infections to zero deaths. They could then redouble efforts to vaccinate the most vulnerable, while investing more in therapeutics and hospital capacity. They could also recast messaging around the virus, highlighting the ability of vaccines and antiviral pills to prevent severe disease, especially against newer variants.
In the longer term, China needs to find new sources of growth and better places for households to store value other than real estate. For the moment, however, the government should at least try not to make a difficult situation worse.
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