Turmoil hits China’s real estate market

The Chinese government has been trying to take some of the air out of an inflated real estate market, but it’s not going to be a soft landing.

Driving the news: After attempting to manage the delicate, controlled deflation of an out-of-control real estate sector, the Chinese government is now said to be reconsidering measures that restricted lending for buyers and financing for developers. 

Catch-up: After China lifted restrictions on private home sales in 1998, the sector boomed. Prices in Beijing and Shanghai, for example, have surged tenfold and twelvefold, respectively, pushing housing prices to levels beyond the reach of local residents.

  • The frenzy of activity and surge in prices led the government to introduce measures back in 2020 that would tamp down on the outsized demand. “Houses are for living in,” Xi Xinping said, at the time, and not for speculation.

  • The policy had an impact: in 2022, developers defaulted on US$50 billion in payments. Remember the fall of Evergrande, the former Chinese property titan? That was one of the nearly 50 major developers that defaulted on their loans.

But then, a surprise coronavirus surge pushed things a little too far. The country’s lockdown-heavy Covid policy further weighed on real estate activity in 2022, and then its recent reversal led to a wave of new infections, depressing economic activity even more.

  • In December, new home sales fell 31% year-over-year, and some analysts expect another 25% drop in 2023. Developers have been cutting wages and laying off staff.

Why it matters: Turmoil in China's real estate sector is an ominous sign for the world's second-largest economy, adding to strains spurred by the country's escalating Covid crisis. The slowdown was cited as an important factor in the World Bank's decision to lower its growth forecast for the global economy, now projected to just narrowly avoid recession.