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BCA Research: Here’s Another Sign of a Weakening Chinese Property Market
China’s real estate players are besieged by declining home prices. bond defaults, and dropping consumer confidence.
China’s new home prices fell in September — the first month-to-month decline since 2015 and a signal of a weakening property market as more Chinese real estate developers default on their debt payments.
The average new home price in 70 Chinese cities dropped by 0.1 percent in September, according to data from the country’s National Bureau of Statistics. More than half of the 70 cities saw price drops in average new home prices last month, compared to less than one-third in August. The real estate and the construction sectors shrank by 1.6 percent and 1.8 percent year-over-year in the third quarter, respectively, according to a supplemental GDP report by NBS.
Evergrande, China's largest real estate borrower that has defaulted on $20 billion of its $300 billion in total debt, is not the only real estate developer whose defaults are behind the deteriorating Chinese property market. Modern Land, a Beijing-based developer focusing on green technology, missed a payment on its $250 million in debt yesterday. Earlier this month, developers Fantasia and Sinic both failed to repay bonds with a value of $206 million and $250 million, respectively.
“[The defaults are] leading to a deterioration in consumer confidence and reducing interest from prospective buyers,” according to a new note from BCA Research, Institutional Investor’s sister company.
Jing Sima, China Investment Strategist at BCA, said that Chinese real estate developers are likely to default on more bond payments in the next two years, although the scale of the missing payments wouldn’t be comparable to that of Evergrande. This is because the industry’s profit margin has been decreasing since 2018, when both mortgage rates and leverage ratios started to decline.
“In the past, you have either loans to developers going up or mortgage rates going up. But since 2018, it has been very clear that both have been trending down,” Sima said.
Many Chinese real estate developers have been following an unhealthy construction cycle, in which they acquire more land before finishing their old projects, Sima added. The policymaker is now addressing the issue by ordering them to “deliver the old projects instead of expanding to new territories.”
Another force behind the sustained weakness of China’s housing market is Beijing’s determination to bring “common prosperity” to the Chinese people. Endorsed by Xi Jinping in August, the term has become widely popular in addressing income inequalities and the wealth gap in China. Real estate developers, which have accumulated extraordinary amounts of capital in the past two decades, are among the regulatory targets of the country’s top policymakers.
“If we look at all the recent regulatory crackdowns, everything is behind the logic of the concept of common prosperity,” Sima said. “In the past, any up cycle of the property market has exacerbated the wealth inequality. [In the future], the policymakers will be more inclined to contain any bubble in the sector because they don’t want to enlarge the wealth gap and cause more discontent among Chinese households.”