China’s housing market is regressing after a brief recovery, underscoring the challenges in the world’s second-largest economy.

Signs of weakness are emerging after housing sales and prices recovered briefly following a historical slump of about 18 months.

China’s property sector is key for economic growth outlook this year, as it accounts for about 20 per cent of the country’s gross domestic product after including related industries.

High-frequency indicators in recent weeks show momentum in home purchases has fizzled. Property investment also continues to contract, and consumers are reluctant to take out mortgages.

That’s despite Beijing rolling out a slew of measures to prop up the market, from lowering home loan rates to easing financing rules for developers.

“After a short-lived recovery in February to March, the release of pent-up demand for home purchases has come to an end,” said Lu Ting, Nomura Holdings’ chief China economist.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

“The property recovery this year will be only moderate.”

The fate of the sector also weighs on the global economy, as it helps drive demand for commodities such as iron ore and copper.

After a bullish start to 2023, iron ore – used in steelmaking – has dropped below US$100 a ton, largely because of the subdued demand for Chinese homebuilding.

Some of the warning signs from recent housing market data showed home sales were dismal over the five-day Labour Day break in May, the first long holiday since China abandoned pandemic restrictions and infection waves eased.

New-home purchases in 40 major cities tracked by data provider China Index Holdings (CIH) were 22 per cent below pre-pandemic levels in 2019. 

Compared with last year, sales were up 25 per cent – but that was mainly due to the low base of comparison with 2022, when Shanghai and other cities were in lockdown.  

The four mega cities, which include Shanghai and Shenzhen, showed a sustained recovery, with new residences sold rising 59 per cent by area from pre-pandemic levels. In regional centres and smaller cities, sales plunged 28 per cent and 42 per cent, respectively. 

That uneven recovery has damped investor sentiment in China’s high-yield dollar bond market, dominated by developers’ notes.

A Bloomberg index has erased an 11 per cent gain from earlier this year to lose 5.4 per cent year to date. A solid turnaround in investor sentiment would need more stabilisation in property sales, said Cary Yeung, head of Greater China debt at Pictet Asset Management. 

In the existing-home market – which is less distorted by seasonal factors linked to the launch of developers’ projects – sales were even worse.

In the first four days of May, second-hand residence sales plunged 44 per cent by area from a month earlier, according to brokerage Zhongtai Securities, which tracks 15 major cities with active existing property sales. That compares with a 61 per cent surge in February, when the market had showed signs of a turnaround for the first time. 

The downturn is a worrying sign as analysts had hoped a sustained recovery in the existing-home market would eventually lift new-home sales, which have been less favored by home buyers in recent years because of delays in construction.

The decline in prices of existing homes started to widen again since March, reaching a four-month high in April, according to CIH data. 

Pricing is less controlled by the government in this part of the market than in new homes. Among 100 cities tracked by CIH, existing-home values fell in 76. 

New-home prices were barely changed in April from the previous month. That said, new-home prices could soon follow suit, as more cities saw a price decline. 

Slower property sales have led to a glut of inventory. Unsold houses have climbed 43 per cent from a recent low in November 2021, around the time home prices began their downward spiral. 

In 100 major cities, new-home inventory as of the end of March could take about 17.4 months to get sold, “still well above a reasonable level of 14 months”, according to estimates from Yan Yuejin, a research director at E-house China Research and Development Institute. 

The outstanding amount of individual mortgages had the smallest increase on record in the first quarter compared with a year ago, reflecting households’ reluctance to add debt.

Demand for home loans is weak due to consumers’ pessimistic outlook for income growth, concerns about delays in new projects, and a shift in views about the long-term value of the sector.  

Some homeowners have even chosen to repay mortgages early to take advantage of falling interest rates. Analysts at Everbright Securities estimate the average monthly prepayment jumped 38 per cent in the first quarter from the previous three months to around 300 billion yuan (S$57.5 billion).

Investment in real estate contracted at a faster pace in March than in the previous month, snapping an improving trend since the end of 2022.

That suggests the rebound in home sales earlier this year has been insufficient to shore up confidence among developers, who have been scaling back land acquisitions.

The sluggish demand in construction can be seen in excavator sales in China, which plummeted 40.7 per cent in April from a year earlier, showed data from the China Construction Machinery Association.

XCMG Construction Machinery expects the industry to decline by 5-10 per cent this year, with a recovery only expected in 2024. BLOOMBERG