China’s property sales are set to fall 30% — worse than they were in 2008, says Standard & Poor’s.

Most apartments in China are sold before the developers have finished building them. Pictured here on June 18, 2022, people select apartments at a development project in Huai’an, Jiangsu Province, near Shanghai.

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BEIJING — Real estate sales in China are set to decline this year by more than they were during the 2008 financial crisis, according to new estimates from Standard & Poor’s, credit rating agency.

The rating agency said national property sales are likely to fall about 30% this year — nearly twice worse than its previous forecast, citing a growing number of Chinese homebuyers who have halted mortgage payments.

Such a drop would be worse than it was in 2008 when sales were down about 20%, Esther Liu, director of S&P Global Ratings, said in a phone interview on Wednesday.

Since late June, unofficial figures show a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred unfinished projects – until developers finish building the apartments.

Most homes in China are sold before they are completed, which generates an important source of cash flow for developers. Companies have struggled to get financing in the past two years as Beijing cracks down on its heavy reliance on debt for growth.

The mortgage strike now is hurting market confidence and delaying the recovery of China’s real estate sector until next year, not this year, Liu said.

If there is a sharp drop in home prices, that could threaten financial stability.

She said that with property sales declining, more developers are likely to fall into financial distress, warning that the handicap could extend to healthier developers “if the situation is not contained”.

There is also the potential for social unrest if homebuyers do not get the apartments they paid for, Liu said.

Limited spread outside real estate

Although the number of mortgage strikes increased rapidly in a few weeks, analysts generally do not anticipate an all-out financial crisis.

In a separate note Tuesday, S&P estimated that pending mortgage payments could affect 974 billion yuan ($144.04 billion) of these loans — 2.5% of China’s mortgage loans, or 0.5% of total loans.

“If there is a sharp decline in housing prices, this could threaten financial stability,” the report said. “The government views this as important enough to quickly distribute relief funds to address deteriorating confidence.”

Chinese policy makers encouraged banks to support developers and emphasized the need to finish building apartments. Authorities have generally expressed more support for real estate since mid-March, while maintaining the motto of “homes to live in, not to speculate.”

“Our concern is that the volume of this support is not large enough to save the situation, [which] now turns into [a] “Worse trend,” Liu said.

Crucially, however, Liu said her team does not expect a sharp drop in home prices due to local government policy. Support prices. Their forecast is for a 6% to 7% decline in home prices this year, followed by stabilization.

While economists at Standard & Poor’s estimate that a quarter of China’s GDP is directly and indirectly affected by real estate, only a portion of that 25% is at a risk level, Liu said, noting that the company does not have specific numbers on the impact of mortgages. Hit the GDP.

A bigger problem that needs to be solved

China’s real estate sector has been intertwined with local governments and land use policy, making it difficult to solve the industry’s problems quickly.

In an analysis published on Tuesday, Xu Gao, director of the China Senior Economist Forum, noted that the amount of residential land completed annually has not actually grown on average since 2005, while the average amount of land sold has declined over the course of the year. That period.

The contraction contrasted with rapid growth in both the area of ​​land sold and housing completed prior to 2005, when a new bidding process for land came into full effect, he said. Xu said the new bidding process has tightened the supply of land and real estate, driving up home prices more than speculation has.

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Goldman Sachs said in a report on Tuesday that investors should consider only the best developers among China’s high-yield real estate debt. “We see relative value in their lower dollar-priced long-term bonds.”

But it is generally a story of uncertainty in one of the largest sectors in China.

“For us, continued pressures in the real estate sector combined with uncertainties related to COVID measures suggest a much murkier outlook for China,” wrote Kenneth Ho, credit strategist.

His potential scenario is one in which credit fears remain elevated but without real systemic concerns, resulting in a negative build-up of investor sentiment in high-yield credit markets.

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