China has a big problem within real estate that will take years to resolve, according to analysis from Oxford Economics lead economist Louise Loo. Looking at nationwide data — whether based on official estimates of unsold inventory or the construction-to-sales ratio — Loo found it will take at least four to six years for real estate developers in China to complete unfinished residential properties.
That means efforts to boost funding to developers and other efforts to resolve China’s property market problems don’t directly address the bigger issue of uncompleted homes. “However one slices the data, the existing excess supply in the market is likely to take at least another four years to unwind, absent a meaningful pickup in demand,” Loo said in a report.
“Increasing supply coming from secondary market transactions – as households, worried about depleting profits from price declines, sell their second or third homes – is an additional drag to this process,” she said, noting that “developers’ inventory is far too large for households to absorb quickly.”
Apartment homes are typically sold ahead of completion in China, making it critical that developers finish constructing the houses if they are to sell more. But financing struggles and other issues have meant developers have had to delay home delivery times — discouraging future home sales.
On the extreme end, residential construction in the relatively poor province of Guizhou could take well over 20 years to complete, Loo said in an email, while it will likely take at least 10 years in several other provinces such as Jiangxi and Hebei.
Real estate and related sectors have accounted for about a fifth to one-fourth of China’s economy. The drop in land sales means local governments may face financial strain if they are unable to offset what’s been a driver of more than a third of revenue.
That means Beijing may need to step in, posing “downside risks to China’s fiscal, economic and institutional strength,” Moody’s said. It downgraded its outlook on China’s government credit ratings to negative from stable.
Despite persistent property market troubles, Oxford Economics’ Loo doesn’t expect significant spillover to the rest of the economy.