With sales plummeting and developers defaulting on debts, China faces a historic plunge in home prices after a six-year high.
New home prices were down by 0.08% as of Wednesday, October 8, in 70 cities across the country. This may seem small, but it poses a potential threat to the economy, as it had been counting on the real estate sector and related industries for more than 25% of its total output.
The result of the Evergrande backlash
This significant drop in home prices is seen as an aftereffect of the recent debacle at the China Evergrande Group. Last month, the mega-developer declared that it was over $300 billion in debt, making it the world’s most indebted property development company.
Chillingly compared to the Lehman Brothers collapse of September 2008, which was the climax of the subpar mortgage crisis in the United States, the impending collapse of the Evergrande Group is expected to have dire consequences on both property buyers and retail customers.
As a result, industry professionals are pressed to prevent a state of panic as researchers at the China Research and Development Institute say that the home market has gone into a downward cycle.
That said, a good number of Chinese citizens are also beginning to wonder if putting their money in real estate is still a good investment. Indeed, many people who have entertained the notion of buying a home are putting it off, as concerns regarding whether builders can still deliver a finished product continue to rise.
In the case of Evergrande, the company has yet to finish over 1.6 million homes for the buyers who put their money into the company’s projects.
A blighted season
Prior to the ongoing pandemic, September was considered the peak season for the Chinese real estate market. This year, however, sales were down by 17%, and the rate of failed property auctions is at its highest since 2018.
Both trends have adversely impacted local government economies throughout China, as existing-home values are down by 0.21% in 35 of the country’s Tier 3 cities. Likewise, 3/4 of Chinese cities are experiencing a significant drop in second-hand home prices.
Landlords throughout the country are bracing themselves for a price war towards the end of this year and well into the first quarter of 2022.
Much of the crisis has stemmed from the tightening of government regulations on the property industry. These have severely restricted the inflow of new financing and have driven many companies into debt as they struggle to stay afloat and complete deliverable projects to their customers. Unfortunately, however, the government continues to be deaf to industry demands to relax these regulations.
But the ongoing property crisis is just one factor that is negatively affecting the Chinese economy. More frequent power outages have also dragged down commerce and industry. Economic growth in the third quarter has slowed significantly since the beginning of the COVID-19 pandemic.