An idle construction site for an Evergrande residential project last year in Taiyuan, in Shanxi Province. Photo / Gilles Sabrié, The New York Times
New home prices in China have fallen, and would-be buyers are thinking twice. That's bad news for the overall economy.
A year ago, business was humming for Liang Jiawei, a property salesperson in Zhanjiang, a coastal city in southern China.
He could sell three apartments in a day without much arm-twisting. The apartments were fairly generic, Liang said, but the new building complex — in an up-and-coming neighbourhood not far from a high-speed rail station — was enough to entice buyers.
Then came a sudden reversal of fortune. China's property sector started to crumble under the weight of its huge debts. What was already shaping up to be the country's worst housing market in years suffered another blow when a new variant of the coronavirus triggered widespread lockdowns and brought the economy to a standstill.
The turmoil has touched off a plunge in new-home sales and depressed real estate prices for the first time in years, jeopardising the prospects of an already fragile economy that had come to depend on housing for job growth and business spending, and putting at risk an important investment for millions of Chinese families.
So far, China's efforts to revive the housing market with lower mortgage rates, easier credit, subsidies and relaxed regulations have not worked. In April and May, new-home prices fell in more than half of China's 70 biggest cities for the first time since 2016, and sales of such properties tumbled nearly 60 per cent.
Zhanjiang, a port city of 7 million people, had some of the steepest price declines among major cities. Liang said he sold only five apartments in April. May was even worse.
"Prices have come down, but enthusiasm for buying houses still hasn't returned," Liang said. "The economy is not good, and the continuous impact of the pandemic has completely changed the situation."
As China slowly emerges from restrictive lockdowns, the country is focused on preventing an economic slowdown. Last month, its premier, Li Keqiang, called an emergency meeting and issued a grave warning to more than 100,000 officials that businesses and local governments needed to act with "clear urgency."
The real estate sector is a large and important lever. Ever since China started to roll out reforms in 1988 for commercial housing, property has become a pillar of an ascendant economy. By some estimates, it accounts for about 30 per cent of China's gross domestic product after factoring in related industries such as construction and property management.
Property also carries a deep significance in Chinese society. For young people who want to marry, owning a home is considered a must before starting a family. Instead of investing in stocks and bonds, Chinese households allocate most of their savings to real estate — at more than twice the rate of Americans.
Also, a hit to real estate prices could ripple through the economy by eroding how much Chinese shoppers are willing to spend on appliances, clothes, jewellery and cars.
With the economy in limbo, Beijing is trying to get people buying property again.
The government suspended a trial program to implement property taxes in March. Last month, Chinese banks cut mortgage costs by the largest amount since a new interest rate system was put in place in 2019.
In addition, various local governments have rolled out dozens of new policies to promote homebuying. Meishan, a city in Sichuan province, said it would offer subsidies for new-home purchases before the end of the year. The government of Wenzhou, a city in Zhejiang province, said it would now permit interest-only repayments for the first three years on mortgages for first-time homebuyers. Huainan, a city in Anhui province, ordered banks to extend more money and shorten loan-approval times, as well as lower the mortgage rates and down-payment requirements for first-time buyers.
For some potential homebuyers, the incentives are not enough to offset the risks.
Cao Jingyu, who works for an outdoor furniture company in Shenzhen, said a lower down payment would just mean more bank payments over time. Given the economy's fragile state and the ever-present possibility of being laid off, she said, she doesn't want to tie up a large chunk of her money in a home.
Earlier this year, she nearly bought an apartment in the northern part of Shenzhen. After making a deposit on a home under construction, she hesitated when she noticed that only 20 per cent of the units had been sold. At the last minute, she backed out.
"I'm still worried about the big risk of buying a home," said Cao, 30. "When I want to sell the property, can I get it off my hands?"
A year ago, the concern with China's real estate market wasn't reluctant buyers but frenzied speculators. When a property in Shenzhen became available in March 2020, the building's 288 units sold out online in 7 minutes, according to state media.
Chinese officials, worried about a housing bubble and its impact on the financial system, enacted the so-called three red lines policy to curb the reckless borrowing habits of the country's biggest property developers.
The new rules, which required companies to pay down debt before borrowing more money, started to expose cracks in the property market. Late last year, China Evergrande Group, a highly indebted property developer, defaulted on bond payments to creditors. Since Evergrande, more than a dozen firms have defaulted.
Amid the debt woes, Chinese officials pushed developers to prioritise finishing building properties that they had already sold. But the rush by firms short of cash to complete projects has raised a new set of problems: protests over shoddy work.
When Evergrande began to run into liquidity problems, an estimated 1.6 million people were waiting for the developer to complete homes that they had already bought.
He Qiang, a 27-year-old car salesperson, purchased an Evergrande property in 2019 on the expectation that it would be complete in 2021. It has been delayed until June.
He said he doesn't think the latest deadline is realistic. The apartments still do not have electricity. The elevators are not finished, and the wood floors are not installed.
And he has already noticed problems. The windows leak. The outdoor spaces are only wide car lanes, with no sidewalks for residents. There are no bushes or trees, just bare patches of grass.
When Evergrande scheduled a ceremony for the building, residents protested and the event was cancelled. The developer told residents that there is no money for anything more.
"We're told not to be too demanding. There are still plenty of people that couldn't have their apartments finished," He said.
Evergrande did not respond to emails asking for comment, and phone numbers listed on its website were disconnected.
People across the country are protesting about quality problems and unfulfilled promises.
Louis Lee, a 38-year-old administrator at a real estate firm, bought an apartment in 2019 at the "Moon on the Sea" complex by Vanke, one of the country's largest property developers. She was told that the complex in Guangzhou would eventually include a shopping mall with grocery stores and an international school — a major selling point for Lee, who has two young children.
But more than a year after she moved in, the school building and mall remain empty. Residents said Vanke told them there was not enough interest from businesses to fill the mall, and an application for the school was tied up in government bureaucracy.
The local district challenged this version of events. It told residents that Vanke hadn't paid the rent for the land in recent years because of a financial dispute with the village, which owned the land. After the matter was taken to court, Vanke eventually paid, but there are currently no plans for an international school.
In April, enraged homeowners hung a banner covering the high-rise's top 10 floors that read "Vanke false advertising," based on residents' photos. Other banners warned people that buying a Vanke home would "ruin their lives." When police arrived to tell the homeowners to remove the banners, protesters refused and clashed with officers. Vanke did not respond to emails asking for comment.
Lee regrets buying the property. She says the financial problems facing developers are leading to quality issues.
"I personally don't recommend buying apartments now," Lee said. "People should really think twice."
This article originally appeared in The New York Times.
Written by: Daisuke Wakabayashi and Joy Dong
Photographs by: Gilles Sabrié
© 2022 THE NEW YORK TIMES
