Is the real estate crisis spreading into an economic downturn as the housing market in China’s major cities freezes amid a ‘transaction cliff’?

Prices of built-up homes in 67 out of 70 major cities across the country fell from a year ago
The recession is spreading to second-tier cities such as Nanjing, Shenyang, and Chongqing, and local areas are on the verge of population extinction
The decline in the real estate market is expected to continue this year, and the Chinese economy is bound to recover for the time being

Prices of existing and new homes are continuing to decline in most of China’s 70 major cities. In large cities, rents are soaring and transaction volume is plummeting, and downward pressure on housing prices is increasing in local cities due to population decline issues. With the real estate market accounting for 24% of China’s total gross domestic product (GDP), there are even concerns that China’s economic slump will continue if the real estate market slowdown continues this year.

‘Housing transaction volume’ plummets in China’s four largest cities

According to China’s National Bureau of Statistics on the 18th, prices of primary housing fell in 67 of China’s 70 major cities nationwide compared to a year ago. In particular, prices of existing homes in four major cities, including Beijing, Shanghai, Guangzhou, and Shenzhen, have fallen by 1.0-1.5%, continuing a downward trend since October of last year.

Prices of new homes also continued to decline in 62 out of 70 cities. Compared to the decline in new home prices in 59 cities as of the end of 2022, the downward mood is spreading. This is the first time since 2014 that both existing and new homes in 70 major cities across the country have fallen.

In fact, in large Chinese cities such as Beijing and Shanghai, a ‘transaction cliff’ phenomenon is occurring due to a backlog of listings and a sharp decline in transaction volume. China’s First Finance Daily reported on the 10th, “Rents in the four major cities, which were solid even when the real estate market in other regions entered a downturn, plummeted and transaction volume decreased significantly,” adding, “It was an era when landlords easily made money due to falling housing rents in big cities.” “It’s over,” he pointed out. In fact, the number of apartments for sale in Beijing as of the end of last year was 160,000, an increase of more than 100% compared to the end of 2022.

The decline in housing prices in major cities is also large. According to a survey by the Financial Times (FT) of 20 real estate brokerages in Beijing, apartment transaction prices in Beijing fell by 10-30% compared to the high point in 2021, depending on the complex. According to China Management News, high-end apartment complexes in Gubei, which is considered a wealthy area in Shanghai, have also fallen 10 to 17 percent from their peak prices, and in Shenzhen, many apartments are known to have dropped to half the price of their peak prices.

Local city housing markets also continue to decline

The decline in housing prices in local cities outside of large cities is no exception. The decline rate in second-tier cities (Chengdu, the capital of the province) and smaller third-tier cities (cities below Chengdu), such as Chengdu, Hangzhou, Nanjing, Shenyang, and Chongqing, was 0.8% each. In contrast to the slight recovery in house prices in first-tier cities in the beginning of the second half of last year, price polarization continues.

In second-tier cities, prices of new homes also fell by 0.5% during the same period. Looking at actual cases, the situation becomes clearer. An official from Zhongyuan Real Estate, China’s largest real estate brokerage, said, “The price of apartment complexes located about an hour’s drive from the city center of Fujian Province in southeastern China has fallen by more than 20% over the past year.” He added, “Hangzhou, Zhejiang Province, also has a lower decline than Fujian Province, but last year “House prices have not recovered at all since falling by more than 15%,” he explained.

In addition, the problem of population decline in local cities is expected to exert downward pressure on housing prices in the future. This is because as the population decreases, the economic growth rate decreases, and as a result, the purchasing power of consumers decreases, which is likely to accelerate the real estate market recession. For example, according to the First Finance Daily, Yichun City and Qiqihar City in Heilongjiang Province began to reorganize and downsize their front-line administrative organizations starting in December 2022 due to population decline and financial difficulties. As of 2020, Yichun City’s population was 878,900, a 23% decrease from 10 years ago, and Qiqihar City’s population decreased 24% over the same period. In addition, Heilongjiang Province experienced the largest population outflow among China’s 31 provinces and cities, with a population decline of 6.46 million in 10 years.

In addition, China’s population began to decline for the first time in 61 years in 2022. Accordingly, among the three northeastern cities, there is not a single city with a population of more than 10 million or a city that is a new first-line city, and there is even a strong wind of restructuring of civil servants in major local governments.

China’s real estate market outlook still bleak

There are many predictions that the decline in China’s real estate market will continue this year. However, there is little concern that the real estate market will fall into a recession and lead to a systemic crisis. This is because, judging from the authorities’ response to the Hongda bankruptcy in 2021, it appears that the Chinese government will do well to prevent real estate market shocks and crises.

In terms of supply and demand, there are concerns about future supply shortages, so it is unlikely that housing prices will plummet. In fact, in the first half of last year, the amount of land purchased by Chinese real estate companies decreased by 10%, and the number of new housing starts decreased by 3.6%. In addition, in some large cities, the population is increasing due to the Chinese government’s reform of the family register system.

However, if the slowdown in the real estate market continues, there are many predictions that the Chinese economy will not be able to escape from a sustained recession. In fact, according to a Nikkei survey of 25 experts from international investment banks and analysis agencies last month, the average forecast for China’s growth rate this year was only 4.6%. This is a whopping 0.5% point lower than last year’s growth estimate (5.2%).

The Bank of Korea’s Beijing office also said in a recent report, “The GDP-driving effect of China’s real estate reaches 24% when including real estate and its related industries,” and “If the real estate market recession continues, the Chinese economy will remain sluggish for the time being due to the combination of cyclical and structural factors.” “This will be inevitable,” he predicted. Currently, the real estate market accounts for 7% of China’s total GDP in a narrow sense, or about 13% in a broad sense. In addition, housing accounts for about 70% of household assets. In fact, it is a ‘real estate republic’ that is increasing the size of the economy through real estate.