Analysis: Wealth shock – real estate crisis in Chinese small towns shakes up households

BEIJING, April 20 (Reuters) – Homeowners in China’s small towns are grappling with a rare housing market slump as buyers stay away, eroding the wealth of millions in a blow to the already fragile consumer confidence in the world’s second largest economy.

Small towns have been hammered by falling property prices for seven months since September, according to the latest tally of 70 major cities by China’s statistics bureau.

Yet this contraction is just the tip of the iceberg.

The bureau’s data does not fully capture the real estate malaise in the roughly 300 cities ranked third or lower, or even the 2,000 smaller county towns and 40,000 cities. According to some estimates, small towns and villages make up about 1 billion of China’s 1.44 billion people.

Buyer sentiment has largely sagged since 2021 after a government crackdown on new borrowing by indebted developers sparked a liquidity crunch. National home prices fell late last year for the first time since 2015. read more

The negative wealth effect of depreciating house prices has trickled down to consumer confidence, dampening the desire to spend even on basics like clothing.

Consumption has already been ravaged by COVID-19 outbreaks that have locked down cities and disrupted local economies. Nationwide retail sales fell in March for the first time since 2020, while unemployment in 31 major cities hit a record high. Read more

“For Chinese consumers to come back strong, not only will the virus have to be overcome, but the real estate sector will also have to revive,” said Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong.

“Particularly in smaller Chinese cities, real estate often accounts for a substantial share of household wealth, with any signs of weakness in the local real estate market weakening consumer confidence and retail sales.”

In the first quarter, overall per capita consumption in China grew 5.7% year-on-year, a sharp slowdown from the 17.6% growth recorded in the previous quarter.

Homeowners with mortgages or those facing uncertain job prospects have already begun to rein in spending.

“I would think twice before buying anything now,” said a homeowner named Shi in Langfang, a Tier Three city in Hebei province, just south of Beijing.

“We don’t travel either, we don’t even visit our parents in my hometown.”

Shi, who owns a hair salon, bought her house a few years ago and was hit by falling valuations even as her monthly mortgage payments remained unchanged.

“I’m worried about my mortgage because the city has been in lockdown for a long time, and (my income) is negative and business is bad,” she said.

About 22% of homeowners in lower-tier cities had mortgages owing, or tens of millions of households, a private survey showed in 2019, while 41% had no mortgages but are still vulnerable to asset depreciation.

MORTGAGE PAIN

Outstanding mortgages stood at 38.8 trillion yuan ($6.1 trillion) at the end of March, a central bank official said last week, with the non-performing mortgage rate holding steady around 0. .3%.

Banks in more than 100 cities have cut mortgage rates by an average of 20 to 60 basis points since March, the official said.

A delivery truck driver named Sun, 36, said the value of a house he bought in Linyi, a tier three city in Shandong province, had fallen since 2021 as its rate mortgage repayment was always linked to the initial appraisal.

“I really don’t want this property anymore, I don’t want to suffer anymore,” said Sun, who is married with two children. He stopped buying new clothes and even reduced his cigarette consumption.

New home prices in Linyi saw no month-on-month gain in March, the fifth month of stagnant growth or decline, according to data from the China Index Academy, a housing research institute. real estate based in Beijing.

In terms of value, Linyi new home prices have returned to mid-2021 levels.

In recent days, social media posts with the hashtag “mortgage payment deferral” have been seen by more than 60 million people on China’s Twitter-like Weibo microblog.

NO REQUEST

House prices in lower-tier cities soared a few years ago when people bought new homes built by developers like China Evergrande Group (3333.HK) and Country Garden Holdings (2007.HK).

The purchases were fueled by government compensation of hundreds of thousands of yuan per household under a nationwide program to demolish aging buildings and redevelop slums.

The chances of a recovery this year appear bleak, analysts say, in a market plagued by oversupply and a long-term exodus of residents to more economically buoyant regions.

At the end of January, new housing inventories in 66 tier-three and tier-four cities stood at 270.39 million square meters with a destocking cycle of 21.09 months, China Real Estate Information Corp (CRIC) said. , an independent real estate consultancy service.

That compared to 37 million square meters in four Tier 1 cities with a destocking period of 11.33 months.

“Confidence in these (lower-level) markets has disappeared,” said Zhang Dawei, chief analyst at real estate agency Centaline.

“No one dares to buy a house.”

($1 = 6.3732 Chinese yuan renminbi)

Reporting by Liangping Gao and Ryan Woo; Additional reporting by Beijing Newsroom Editing by Shri Navaratnam

Our standards: The Thomson Reuters Trust Principles.