Business major

Analysis: China’s economic headwinds chill its wary new buyers

HONG KONG/BEIJING, June 6 (Reuters) – After two years of hunting, Volar Yip has put his dream of buying a new home in the southeast Chinese city of Foshan on ice, anxious to make a major financial commitment in the context of a significant slowdown in the world’s second largest economy.

The 32-year-old owns a multimedia studio and many of his clients, including government departments, are now cutting their advertising budgets.

“The more I read the news, the more I worried,” Yip told Reuters. “All this news about China – the economy, the real estate market and the pandemic. Not much was positive.”

Join now for FREE unlimited access to Reuters.com

Register

His decision to put a house purchase on hold, which would have brought him closer to his daughter’s school, comes even as banks cut mortgage rates. Read more

Growing cautiousness among young buyers in China’s struggling property market, which accounts for a quarter of gross domestic product, presents a major challenge for policymakers in Beijing now scrambling to revive property activity.

The weakness in the real estate sector, already under huge debt, adds to the major disruption caused by China’s zero COVID policy, which has upended factory and retail activity this year and cast a cloud over the global economy, with international companies increasingly worried about the outlook.

Despite a recent policy easing in the real estate sector, sales fell 47% in April from a year earlier, the biggest drop since August 2006.

For Yip, the mortgage rate cuts would save him around 400 yuan ($59.72) on the monthly payment for a residential apartment worth 2 million yuan ($298,583) he is looking for.

“It’s not significant at all,” he said.

NO QUICK REBOUND

Property developers, who had hoped the market would bottom in the second quarter, revised down investor expectations for full-year sales after the first five-month plunge, with no rebound in demand in the near future. Read more

China’s tough COVID-19 restrictions, combined with worries about a deeper real estate correction and stalled construction, now cloud Beijing’s 5.5% economic growth target for 2022, adding to risks weighing on the global economy due to rising inflation and rising interest rates.

The national unemployment rate climbed to 6.1% in April, the highest since February 2020 and well above the government’s 2022 target of less than 5.5%. Even high-growth Internet and technology companies are laying off staff.

In an effort to boost home purchases, China cut its benchmark mortgage rate more than expected last month, a week after lowering the floor on mortgage rates for first-time home buyers. Read more

A senior banker at a major Chinese bank, however, told Reuters that a recovery in mortgage applications so far remained elusive.

BUYER FEELING

With mortgage rates already at the bottom of the range and further disruption from coronavirus shutdowns, it will take time for favorable mortgage conditions on their own to support loan growth, Moody’s said in a report last week.

Household loans, including mortgages, contracted 217 billion yuan in April, compared with an increase of 528.3 billion yuan in the same period last year, central bank data showed.

“The Omicron wave and the draconian shutdowns in some 40 cities have significantly limited Chinese household mobility, employment, income and confidence,” said Nomura’s chief China economist, Ting Lu.

“A majority of college graduates this year may not be able to find employment due to the severe economic downturn.”

Official data showed the unemployment rate for 16-24 year olds hit a record high of 18.2% in April.

Weaker home sales would mean reduced cash flow for developers, many of whom are struggling to pay suppliers and creditors, and hurt local government revenue from land deals.

A credit crunch in the real estate sector, triggered by tighter debt limits, has pushed some companies such as China Evergrande Group (3333.HK), the world’s most indebted developer with more than $300 billion in debt , in default.

Very few see a recovery in property developer finances in the near future.

Andy Lee, CEO of real estate agent Centaline China, said current buyer sentiment is worse now than at the end of last year, when credit conditions were even tighter.

“In some cities the streets are practically empty, some internet famous shops have lost 80-90% of their turnover – how do you ask them to buy property?” said Lee.

A senior executive at a Shanghai-based developer said that after many years of property market growth, Chinese investors are now choosing to wait out the macro uncertainty.

A 30-year-old woman looking to buy a house in the eastern city of Hangzhou said she would wait for the economy to improve even if that means she misses the price drop.

Her job prospects are her biggest concern.

“Even famous companies like Alibaba are laying off people,” she told Reuters on condition of anonymity. “I’m afraid that I won’t be able to earn enough money to pay my mortgage.” Read more

Join now for FREE unlimited access to Reuters.com

Register

Reporting by Clare Jim and Xie Yu in Hong Kong, Liangping Gao in Beijing; Editing by Sumeet Chatterjee and Sam Holmes

Our standards: The Thomson Reuters Trust Principles.