The Collapsing Chinese Real Estate

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Apurva Dhamankar

9/21/20222 min read

Since 2020, the housing sector, which accounts for a quarter of Chinese economic output, has been in crisis, and thousands of home buyers have refused to pay their mortgages.

So far in the story: China, the world's second-largest economy, is experiencing a crisis in its once-thriving real estate sector. The People's Bank of China (PBOC) cut the five-year Loan Prime Rate (LPR) by the most it has ever done in order to contain the crisis. The 1.5 percentage point reduction in the five-year LPR to around 4.2 percent would reduce the cost of housing mortgage repayments across China. Meanwhile, data from China's National Bureau of Statistics showed that property investment in the country fell by more than 12% year on year in July. Already rattled by headwinds from slowing economic growth, Covid disruptions and record-high youth unemployment, Beijing is placing financial and social stability at the top of its priorities. Efforts that have been contemplated so far included a grace period on mortgage payments and a central bank-backed fund to lend financial support to developers. Either way, banks are expected to play an active role in a concerted state bailout.

China's residential property vacancy rate was 12% on average across 28 major cities. According to the report, this is second only to Japan in the world and higher than the 11.1% vacancy rate in the United States. China's central bank unexpectedly cut key interest rates, bolstering support for an economy beleaguered by Covid lockdowns and a deepening property slump.

On Monday, the People's Bank of China reduced its five-year loan prime rate to 4.30% from 4.45% and its one-year loan prime rate to 3.65% from 3.70%. The Chinese central bank cut the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points last week.

Home prices in many cities are falling after a long period of rise, according to data from Chinese real-estate developers and official statistics. According to industry data provider China Real Estate Information Corp., sales of apartments by the country's largest developers have fallen annually for 13 consecutive months.

Thank you.

Regards,

Harsh Gosalia,

Kautilya, IBS Mumbai.

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