Spluttering dragon: Crisis builds in China, yet shafts of light remain

Confidence has drained from China’s residential market with prices dropping and the central bank slashing rates to 14-year lows. But signs of recovery can be spotted in Beijing and a handful of large cities in the country

The second phase of Juiyu Dragon City, a residential development in Zhengzhou, was supposed to have been completed by the end of 2019. That was the date developer Henan Jiuyu Real Estate Development Company Limited told new residents they could move in. Most had made substantial down payments to the developer, and many secured mortgages with banks.

In July 2020, after more than half a year of delays, a prospective resident noticed workers dismantling scaffolding at the site of the seven 20-storey buildings and filed an online complaint with the city government in a bid to ascertain when the project would be completed. After numerous similar complaints, and despite local government reassurances, two years later the project has still not been finished, leaving residents unable to move into their new homes for nearly three years.

In July, stranded buyers of apartments at Juiyu Dragon City joined forces to issue a warning that they would begin a boycott of their mortgage repayments the following month.

“The owners of Juiyu Dragon City have defended their rights many times,” it read. “But no substantial progress has been made so far.”

Juiyu Dragon City is among at least 44 housing projects in Zhengzhou to have witnessed mortgage boycotts by angry residents, more than any other city in China. More than 330 residential developments have seen similar protests across the nation as the economic downturn has impacted millions of ordinary Chinese.

Mortgage boycotts represent the most visible sign yet of a property crisis in China as developers fail to complete projects paid for in part by ordinary buyers, causing a drain on confidence across the sector — and increasingly the national economy.

House prices in China’s largest cities fell for the tenth straight month in July, including in Zhengzhou where new homes fell 3.6 percent compared to a year earlier, according to central government data. Smaller cities have fared worst. Beihai, a beachside city in Guangxi province close to China’s border with Vietnam, has been the worst performer among the country’s largest cities with 8.8 percent wiped off new home prices in a year.

“In the past decade it could not be imagined that so many projects in tier-one cities or provincial cities would be so delayed,” says Regina Yang, head of research at Knight Frank in Shanghai. “The imbalance in supply and demand in many cities has pushed the market to reduce inventory—and prices continue to drop.”

Sharply falling sales indicate that ordinary chinese buyers have grown wary of paying upfront for properties before completion, thereby starving developers of new funds with which to acquire land and build new homes

Almost every indicator of China’s property sector has sounded the alarm in recent weeks. The National Real Estate Climate Index, a composite of indicators including investment, capital, and sales published by the National Bureau of Statistics in Beijing, fell off a cliff in January and has since fallen well below 100 points at 95.26. Any reading below 100 points to negative sentiment trending across the sector.

In the first half of this year, sales for China’s 100 largest property developers fell 50 percent, according to data from China Real Estate Information Corporation. In August, China’s largest developer by sales, Country Garden, warned that profits in the first half of the year fell by up to 70 percent, “caused by the downturn in the market and slowdown in construction progress”. Sharply falling sales indicate that ordinary Chinese buyers have grown wary of paying upfront for properties before they are completed amid growing delays, thereby starving developers of new funds with which to acquire land and build new homes.

After the number of projects facing mortgage boycotts across the country surpassed 300 in late July, China’s main policymaking body, the Politburo, urged local governments to take responsibility for completing delayed developments. Since then, Beijing’s response has been swift. A RMB-300 billion (USD44 billion) rescue fund led by the Construction Bank of China was created in late July. And in mid-August, banks announced a RMB 200-billion (USD29 billion) fund for distressed construction projects which could be turned into social or rental housing. A few days later the central bank slashed minimum mortgage rates to just 4.1 percent, the lowest in 14 years. Analysts including ING said they expect more rate cuts by the end of the year if China’s housing market continues to struggle.

“At present, though policy support is increasing, follow-up mainly needs to repair market confidence,” says Lu Ming, northern China director of research at Colliers.

Although Beijing has shown a growing willingness to intervene, there are few signs of a market recovery, and bright spots are limited. Only the country’s very largest cities have bucked the downward trend.

Shanghai, Beijing, and Guangzhou all recorded modest price growth in July compared to both the previous month and a year earlier, according to central government data. Beijing saw prices increase more than 4 percent in the year before July 2022. The very top of the market performed poorly with high-end apartment volume decreasing in the second quarter by more than 17 percent compared to the period January to March as prices fell slightly, according to Savills China.

Yet new residential supply volume overall soared 164 percent, and transactions also increased nearly 20 percent in Beijing during the second quarter of this year. The capital has remained relatively untouched by mortgage boycotts with just three impacted developments reported so far, and only one in central Beijing. A recovery was already underway in the Beijing residential market in the second quarter, according to Savills in its market update for the capital released in July.

“Despite the resurgence of the epidemic that continued to dampen the economy, the first-hand residential market performed better than the last quarter,” says Vincent Li, a director of research for North China at Savills. “Both supply and demand [were] seen to be improving.”

The original version of this article appeared in Issue No. 174 of PropertyGuru Property Report Magazine. Write to our editors at [email protected].