Many Chinese provinces are witnessing a decline in housing prices, something that has happened for the first time in six years. Out of the 31 provincial-level divisions, 16 recorded a fall in housing prices in August. This includes cities that are directly administered by the central government. Prices are at their lowest since March 2015, according to official data.
However, official figures may not reflect the reality of the situation. In an attempt to quickly get their hands on cash, real estate developers are in a rush to dispose of assets and are offering steep discounts. Developers like China Evergrande are selling properties for half the original price.
To restrict the decline in real estate prices, authorities have started taking action. In Zhangjiakou and Yueyang, developers are banned from selling new properties over a 15 percent discount. In Wuxi, authorities have prohibited the sale of properties below their construction cost. Ten cities, most of which are in the lower tier, have placed restrictions against lowering real estate values.
The fall in property prices is happening in conjunction with a decrease in demand. Several big developers have reported lower sales numbers for September; many have seen sales drop by as much as 30 percent Year-on-Year. According to Chinese data provider CRIC, the 100 largest developers in the country saw a 36 percent YoY sales decline last month.
In an interview with The Wall Street Journal, Logan Wright, director of China market research at the Rhodium Group, said that falling sales could affect developers to the extent that they might scale down future plans or even halt work on existing projects.
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“If that continues, then the broader concern is whether some of the tightening measures come at the expense of the health of the entire sector… You are going to see weaker financial conditions and weaker construction activities spilling out into the broader economy,” Wright said.
The decline in property prices could also be a trend that is here to stay. In an article at Foreign Policy, Wright said that the Chinese property market is “fundamentally imbalanced” due to “too much housing” and “too little demand among owner-occupiers.” He believes that household formation rates peaked between 2013 and 2015; that’s when China’s working population started declining.
However, developers continued pumping out more projects. In 2019, developers started construction of 18 to 19 million units. When finished, there might not be enough people to buy these apartments; prices could drop even more.
Wright estimates urban household formation rates to be just around five to seven million per year for the next 10 years, a significant drop from the nine to 10 million figure a decade back.
Declining property prices and sales will also hurt local governments that depend on taxes and other fees collected. In communist China, the land is under collective or state ownership. To get land for construction, developers have to buy usage rights from local governments. With a decline in annual funds, many local administrations will be unable to service their debts.
“In general, the proportion of land sales revenue for local governments in China is quite large, at over 20%. So if land sales decline or their growth slows, local government spending will see a certain amount of pressure,” Betty Wang told Reuters. Wang is the senior China economist at ANZ in Hong Kong.
In 2020, land sales across communist China surged to 8.4 trillion yuan ($1.3 trillion) which is equal to the annual GDP of Australia. But this past August, nationwide land sales fell by 17.5 percent YoY.
