Wealth shock – property bust in small Chinese cities rattles households

Smaller cities have been hammered by falling home prices for seven months since September, the latest tally of 70 major cities by China’s statistics bureau shows.

Yet this contraction is just the tip of the iceberg.

The bureau’s data does not fully capture the property malaise across the roughly 300 cities classified as third-tier or lower, or even include the 2,000 smaller county-level cities and 40,000 towns. By some estimates, small cities and towns account for around 1 billion of China’s 1.44 billion population.

Buyer sentiment has broadly sagged since 2021 after a government crackdown on new borrowing by indebted developers sparked a liquidity crisis. Nationwide home prices fell late last year for the first time since 2015.

The negative wealth effect of depreciating home prices has rippled through to consumer confidence, curbing the desire to spend even on basic goods such as clothing.

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

“For Chinese consumers to come back full force, not only will the virus need to be vanquished, but the property sector will need to revive as well,” said Frederic Neumann, co-head of Asia economics research at HSBC in Hong Kong.

“Especially in China’s smaller cities, property often accounts for a substantial part of household wealth, with any sign of weakness in the local real estate market dampening consumer confidence and weakening retail sales.”

In the first quarter, China’s overall consumption per capita rose 5.7 per cent on-year, slowing sharply from 17.6 per cent growth in the year-earlier quarter.

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

“I’d think twice before buying anything now,” said a homeowner surnamed Shi in Langfang, a tier-three city in Hebei province just south of Beijing.

“We’re also not travelling, not even visiting our parents in my hometown.”

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

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

About 22 per cent of homeowners in lower-tier cities had mortgages to pay, or tens of millions of households, a private survey in 2019 showed, while 41 per cent had no mortgages, but are still vulnerable to depreciating assets.

As of end-March, outstanding mortgages stood at 38.8 trillion yuan ($6.1 trillion), a central bank official said last week, with the non-performing mortgage ratio steady around 0.3 per cent.

Banks in over 100 cities have cut mortgage rates by an average 20-60 basis points since March, the official said.

A delivery truck driver surnamed Sun, 36, said the value of a home he bought in Linyi, a tier-three city in Shandong province, had fallen since 2021 while his mortgage payment rate was still tied to the original valuation.

“I really don’t want this property anymore, I don’t want to suffer,” said Sun, who is married with two children. He has stopped buying new clothing and even cut back on cigarettes.

New home prices in Linyi saw zero gains in March month-on-month, the fifth month of either stalling growth or declines, according to data from China Index Academy, a Beijing-based property research institute.

In value terms, Linyi’s new home prices have fallen back to mid-2021 levels.

In recent days, social media posts with the hashtag “postponing mortgage payments” had been viewed by over 60 million people on China’s Twitter-like microblog Weibo.

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

The purchases were fuelled by government compensation in the hundreds of thousands of yuan per household under a nationwide programme to demolish aging buildings and redevelop shantytowns.

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

As of end-January, inventories of new homes in 66 tier-three and tier-four cities stood at 270.39 million square metres with a destocking cycle of 21.09 months, said China Real Estate Information Corp (CRIC), an independent property consultancy service.

That compared with 37 million square meters in four tier-one cities with a destocking period of 11.33 months.

“Confidence in those (lower-tier) markets is gone,” said Zhang Dawei, chief analyst at property agency Centaline.

“No one dares to buy a home.”

REUTERS