Nearly a year after revelations that one of China’s largest property developers—China Evergrande Group—was on the brink of default, the country’s housing market remains in an extremely weakened state—effectively, a crisis. Numerous homebuilders have defaulted on their bonds (over US$20 bln year to date), housing sales have collapsed (-30.3% y/y in the first eight months in value terms) and construction of hundreds of new housing projects has stalled. We believe it will take time, perhaps well into next year, before the property market gradually recovers. This is bad news for the economy that is already being dragged down by more COVID outbreaks and uncertainty over Beijing’s zero-COVID strategy.
The importance of housing cannot be overstated as it, along with the expansion of the manufacturing sector, have played critical roles behind the Middle Kingdom’s economic boom over the past two decades. Measured as a share of nominal GDP, residential investment has averaged a hefty 13.5% over the past ten years. Housing is estimated to account for a hefty 25% of China’s economy when including all upstream and downstream activities. Compared to some of the more notable housing crashes that recently occurred in Ireland, Spain and the U.S., the scale of housing investment in China is concerning, though much of it is needed to support the urbanization process. However, this process is far from complete as the country’s urbanization ratio just hit 65% in 2021, which is the original target in its 14th Five-Year Plan (2021-25). Further out, Beijing has stated its ultimate urbanization objective is to reach 75% by 2035, which is closer to advanced economy levels of around 80%.