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China released its May national housing price data on June 15. Beijing and Shanghai had the largest fall in second-hand home prices among 70 large and medium-sized cities.
The price of second-hand homes in Shanghai fell by 0.8 percent compared with the previous month, the largest drop among cities surveyed, and Beijing fell by 0.6 percent.
Experts believe the fall in prices in the two megacities is a sign of a bad economy.
U.S.-based economist Davy J. Wong explained that the majority of Chinese investors have been limited to real estate because of limited investment channels under the current ruling regime.
He said that Chinese people in general believed real estate provides a better cushion against inflation and depreciation.
In China, local governments and developers who set the new housing market price have the real estate market fairly monopolized; “but the second-hand market is fairly free for maneuver, and thus reflects the true market in China,” he said.
In a 2019 report of the People’s Bank, 74.2 percent of tangible assets of urban households were housing, in a nationwide survey of 30,000 urban households; whereas real estate accounted for only around 30 percent of total household wealth in the United States, said the Chinese media report.
The weak economy has forced everyone to cut down their consumption, Wong analyzed. The three-year zero-COVID policy has ruined people’s confidence in the future. He believed many more people choose to sell their properties to ease financial stress, “It’s a risk management,” he said.
Wong said the falling second-hand housing prices in Beijing and Shanghai suggested the supply is too large for the transaction volume to keep up.
The Sagging Economy
Wong indicated that exports have supported China’s economic growth for the past 30 years plus. But, a greater driving force comes from investment, he said, adding that “Real estate development contributed to half of the investment in China.”
However, real estate investment is still highly related to exports. He explained that the companies and industries needed both land and real estate; foreign capital would also occupy sources of land and real estate. When exports are sagging, “foreign capital won’t inject into the market, the Chinese market is not likely to recover soon, and the real estate outlook is certainly worrisome,” he said.
Shih-tsung Huang, a finance commentator, said that the real estate market in Beijing, Shanghai, Guangzhou, and Shenzhen has had a great impact on the Chinese market. Its decline will inevitably lead to the decline of the entire Chinese real estate industry. The series of domino effects could be transmitted to the banking system or the general household debt.
Judging from past experience, he said the real estate market would rise and fall, but China’s real estate has not had such a rise-and-fall cycle. “It is possible that Chinese real estate is now facing a relatively large setback pressure,” he said.
For instance, he said, the poor real estate market was observed in the Japanese banking crisis of the 1990s, the 1998 financial turmoil in Taiwan, and the 2008 and 2009 financial crisis in the United States. “The decline of real estate, for example, by 20 to 30 percent will trigger a crisis in the entire economy and even a crisis in the entire financial system,” he said.
He said economists are paying close attention to the real estate market and the likely collapse of the bubble in China, he said, “When [Chinese leader] Xi Jinping mentioned ‘prepare for extreme scenarios,’ I think China is worried.”
On June 7, Xi said that to secure “domestic consumption demand” will “secure regular economic operation under the extreme scenarios,” according to the Chinese media report.
Song Tang and Yi Ru contributed to this report.