SHANGHAI – China's previously red-hot housing sector is cooling as the investors and speculators that had helped drive demand sour on the market, squeezing the earnings of property developers and raising concerns over knock-on effects for the real economy.
Major developers all reported dismal sales for January. Sales at China Vanke came to 48.9 billion yuan ($7.22 billion) , a 28% decline on the year. Country Garden Holdings' sales fell by half to 33.1 billion yuan, while China Evergrande Group logged a 33% drop to 43.2 billion yuan. Sunac China Holdings reported an 8% rise, but even this marked a sharp slowdown from the 27% jump for 2018 as a whole.
The drop-off owes to a plateauing real estate market. Prices for new housing have barely budged over the past year in Shanghai and Shenzhen, and edged up just 2% in Beijing. Rents in Shanghai have remained flat since late 2016, according to research company Ehomeday.com.
The Chinese government in 2016 began tightening regulations on property sales to curb a surge in prices. Tougher restrictions on buying second homes discouraged investors, and the flood of money into the market gradually tapered off.
Even with the broader economy slowing, the central government has turned to public works spending and tax breaks for a boost, but it has not moved to loosen the real estate restrictions for fear of reinflating the bubble.
Developers are taking steps to stimulate demand. Country Garden slashed prices by 20% to 30% on some properties in locations including Shanghai, neighboring Jiangsu Province, and Jiangxi Province to the south.
But the move infuriated owners at a Shanghai condo complex, who accused the developer of cheating them and demanded refunds. Lower prices mean that investors who had already bought properties in hopes of flipping them for a profit face a higher risk of losses.
Evergrande apparently also cut prices on some properties by more than 10% in an effort to meet its 2018 sales target. But the scramble to lift year-end sales likely ate into demand early this year, contributing to the drop-off in January.
"Survival" is now the watchword of Vanke Chairman Yu Liang, who has stressed repeatedly that improving his company's cash position is the top priority. Other developers seem to face a similar conundrum. The total number of land transactions in 300 cities sank 1% on the year last month, as developers think twice about acquiring land for new properties that consumers appear increasingly reluctant to buy.
The decline is a blow to local governments, which brought in more than 6.5 trillion yuan from selling land last year. For debt-laden governments faced with slumping tax revenue, land sales serve as a vital source of funding for infrastructure projects and other measures needed to prop up local economies.
The prospect that local governments could find it harder to afford public works spending has rattled other markets. Prices of Chinese steel product futures have fallen steadily from last summer's peak.
A protracted real estate slowdown could affect employment in the construction industry as well. Migrant workers typically return to work in late February after the Lunar New Year holiday. Real estate sales and employment trends over the next month will help provide a clearer picture of the direction of China's economy.