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China's Real Estate Sector: Navigating the Medium-Term Slowdown and Ensuring Sustnable Development
Real estate has been a pivotal driver for China's economy, fueling its rapid growth in recent decades with contributions reaching up to 20 of total activity. However, this reliance on real estate has come with significant risk accumulation.
In the past decade before the pandemic, home prices were inflated relative to household incomes due to consumers' preference for investing their substantial savings into real estate amidst limited attractive alternatives. Expectations that property values would continue to rise allowed developers to borrow aggressively, using land sales as a crucial source of revenue for local governments.
Recognizing this vulnerability, authorities have appropriately focused on mitigating risks and facilitating the sector's transition towards a more sustnable and appropriate size. Post-pandemic measures were decisive in curbing excessive borrowing by developers and other real estate-related risks. As a result, real estate activity has experienced a sharp contraction, leading to recent efforts med at boosting rental housing, expanding affordable housing, and enhancing urban neighborhoods that have been underdeveloped.
In its third year of experiencing a downturn, progress towards downsizing the sector is rapid in some areas but still faces challenges that highlight ongoing sustnability risks. Housing starts have plummeted by over 60 compared to pre-pandemic levelsa pace only witnessed during the most severe housing busts worldwide within the last three decades. Declining sales are due to homebuyer concerns regarding developers' ability to fund project completion and fears of future price declines.
Facing cyclical pressures and structural adjustments, China's housing market faces additional challenges from demographic changes in coming years. The need for new housing will diminish as the population dwindles and urbanization slows down. Previous government subsidies that facilitated millions to move into modernized living spaces are expected to have less impact as declining land sale revenues constrn local government fiscal capacities, and fewer residents reside in older properties.
Given these cyclical pressures and structural adjustments ahead, real estate investment projections suggest a decline likely to be 30 to 60 below its pre-pandemic level, with gradual recovery. This trajectory mirrors major housing downturns experienced by other countries undergoing similar slowdowns in construction activity.
Boosting sping on affordable housing and urban development projects this year could partially mitigate the investment drop-off. However, these efforts are unlikely to alleviate the vast inventory overhang held by troubled developers adequately.
Nevertheless, a smoother transition for China's real estate sector is achievable through strategic interventions. Allowing more market-driven adjustment in home prices and expediting restructuring of insolvent developers would facilitate inventory clearance and allay fears about continuous price decline. Rules that prevent banks from recognizing bad loans to developers should be phased out.
To support viable developers, the authorities should also implement stricter rules to prevent future risk accumulation. Insuring homebuyers agnst developer flure could help restore confidence in property transactions while easing sales pressures for developers. Strengthened escrow regulations for pre-sale financing would further enhance legal protections for homebuyers.
Implementing a nationwide property tax and enhancing pension or other savings options are also necessary steps to reduce household reliance on housing investments. Fiscal reforms addressing local governments' structural mismatches between revenues and sping obligations will be crucial in reducing their depency on land sales and real estate activities.
The IMF, an international financial institution dedicated to fostering global economic stability and cooperation, stands ready to support China's efforts towards sustnable real estate sector development through research, policy advice, and capacity-building initiatives. Together, with the Chinese authorities' proactive measures and the IMF's expertise, we can ensure a smoother transition for China's real estate sector, mntning its role as an engine of growth while ensuring long-term sustnability.
Henry Hoyle serves as an economist in the Asia and Pacific Department at the International Monetary Fund IMF. Sonali Jn-Chandra is the mission chief for China at the IMF.
For more information:
International Monetary Fund
https:www.imf.org
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This article is reproduced from: https://www.imf.org/en/News/Articles/2024/02/02/cf-chinas-real-estate-sector-managing-the-medium-term-slowdown
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