China’s crumbling housing sector delivers big blow to downstream industry, overall economy

Stress in China’s housing sector, accounting for about 30 per cent of the country’s GDP, is deepening. Project delays and empty homes in the world’s second largest economy have now started hitting the ancillary industries. The crisis in the critical real estate sector started in 2021 with the default of property giant Evergrande. While market watchers continue to monitor Country Garden — one of the top property developers of China, which is now on the verge of default, the crisis is not restricted to the private sector giants. It has impacted the state-owned real estate developers as well, reflecting the depth of the problem.

According to Standard and Poor’s, more than 50 Chinese real estate developers have failed in making payments in the last three years. The cash crunch of these developers has had a devastating cascading effect on economy with a large number of small and medium enterprises dealing in furnishing, tiling, and painting among others feeling the pinch.

That apart, the oversupply of homes has impacted the demand for cement and steel too.

The National Bureau of Statistics data revealed that as of the end of August, the combined floor area of unsold homes stood at 648 million square metres (7 billion square feet). That would be equal to 7.2 million homes, according to Reuters calculations, based on the average home size of 90 square metres.

“Many of the smaller firms dealing in bathroom fittings, tiling and furnishing that typically serve as suppliers to the bigger real estate companies have been hit badly as their payments have remained incomplete,” a person who has businesses in China said. Though Chinese President Xi Jinping first observed that “houses are for living in, not for speculation” at the Party Congress way back in 2017, the ethos has now started to haunt the developers as well as the prospective home buyers.

More than 70 per cent of the Chinese household wealth is invested in real estate. The steady drop in prices have therefore created an unprecedented paranoia among the people.

“What is concerning is that the confidence level of the local people is eroding rapidly and this is further leading to tightening in their spending pattern,” the person said, adding that the economic uncertainty leading to knee jerk reaction by Beijing, which for instance halted publication of key economic data including statistics related to unemployment, has prompted many multinationals to recalculate their business plans.

“It is a fact that many of them feel that the China story that was seen in the pre-Covid times is over,” he added.

According to South China Morning Post, unlike developed markets where second-hand homes dominate the market and properties are largely sold upon completion, a vast majority of new Chinese properties are sold often before construction starts.

But the gravity of the crisis can be assessed with He Keng, a former deputy head of the statistics bureau expressing serious concerns.

At a forum he said that it is not clear how many vacant homes are there at present in China but the number is huge enough and even 1.4 billion people will not be able to fill them.

“How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes is enough for 3 billion people,” he said.

“That estimate might be a bit much, but 1.4 billion people probably can’t fill them,” he added.

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