(Bloomberg) — A wave of stimulus aimed at reviving China’s housing market — billions in bank loans, lower interest rates and support for developers — has done little to help Echo sell her home near Shanghai.

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The media worker has only received four nibbles from potential buyers in six months, and she is considering a 10% reduction in the asking price of 3.3 million yuan ($460,000). She believes this stagnant housing market, the worst in China’s recent history, will continue for years.

“Everyone is waiting for a sharp drop in house prices before they make a buying decision,” said Ecko, who asked to be identified only by her first name for fear of retaliation due to her negative outlook. “There will be a vicious cycle.”

While many economists say the slowdown in China’s housing sector won’t get worse and stimulus will start this year or next, the reality on the ground for sellers like Eco is more bleak.

Home sales and prices remain sluggish amid the economic slowdown and Covid Zero restrictions. Consumer confidence is nearing a record low, and a recent central bank survey showed that 73% of households expect real estate prices to remain unchanged or fall in the near term. Even the Golden Week holiday, which is usually a good time for real estate, can provide a spark, with sales down 38%.

As President Xi Jinping and other Communist Party leaders gather on Sunday for their twice-a-decade conference, few issues matter more than the housing market, which has been hobbled by Beijing’s own policies aimed at curbing credit risk while making house prices higher. accessible to all in the name of “common prosperity”.

With estimates ranging from $2.4 trillion for the new home market to $52 trillion for existing inventory, the massive expansion of China’s residential housing sector means there’s a lot at stake.

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Real estate accounts for about a quarter of GDP and about 40% of household assets. Bursting a bubble of this size without triggering a financial crisis is difficult for any government, and previous attempts in Japan since 1989, and the United States in 2007-2008 have proven disastrous.

Policymakers are showing increasing urgency to deal with the fallout. Among the latest moves, the central government has allowed nearly two dozen cities to cut mortgage rates. Financial regulators have asked the largest state-owned banks to provide at least 600 billion yuan of financing for the industry. Beijing even offered a rare tax break for people who buy a new home within a year of the sale.

So far, none of the moves have done much to restore confidence in a sector that has been in endless pain in the past 18 months. The government’s campaign to borrow has hurt developers such as China Evergrande Group, leading to a wave of defaults on more than $50 billion in dollar bonds.

An analysis by the International Monetary Fund this week showed that 45% of developers may not be able to cover their debt obligations with profits, and 20% of them could become insolvent if the value of their inventory is determined by current real estate prices.

The measure of high-yield debt is still near its lowest level in more than a decade, while the main real estate stock index is down 39% this year. Stocks and real estate bonds aren’t likely to go up until home sales go up.

Consumers are feeling the pinch, too. The unrest sparked unprecedented protests after a liquidity crunch for developers delayed construction across China, prompting hundreds of thousands of homeowners to boycott mortgage payments until their homes were built.

The potential spillover effects on the economy are enormous. Millions of families are seeing their nest egg rapidly losing value while the Covid lockdowns have dented consumer confidence. This translates into a record increase in savings and the weakest demand for loans since before the global financial crisis. In the year to September, banks extended the lowest amount of mortgages in any year since 2015.

The current downturn, now in its second year, is already breaking records, making it the most severe and longest recession since private home ownership began in the 1990s. While sales in major cities like Beijing, Shanghai and Shenzhen saw a slight uptick in the first weeks of September, the overall market in dollar terms for the top 100 developers was still down 25% last month compared to a year earlier.

Lengmu, the real estate agent in Shanghai, has only done two deals since the city lifted its lockdown in June. He says the average number of used homes sold in a single building has fallen to less than 10 over the past six months, compared to about 30 to 50 in a good year. Customers have left town or are waiting for prices to stop falling.

“It’s really hard to broker a deal these days,” said Lengmu, who wanted to use only his first name and worked in real estate for four years. He hopes the market will improve after the interest rate cuts. If you can’t secure any deal, you won’t get paid more than your base salary. I feel pressured.”

market floor

Some economists say policy moves, along with a gradual easing of Covid restrictions, may help the market find ground this year and plateau into 2023. Few are calling for a sharp recovery.

“Government actions are intended to prevent difficulties in the real estate market from spillover into the broader economy rather than stimulate the housing market,” Morgan Stanley analysts including Stephen Cheung and Chloe Liu wrote in a note dated October 9. They don’t see a rebound until the second quarter of next year. Deutsche Bank AG says the market may have bottomed out in August.

Optimists point to China’s burgeoning middle class that will fuel new levels of spending. China overtook Japan as the world’s second largest economy in 2010, aided by the largest urbanization in history.

However, Bloomberg Economics says this trend is slowing, with about 65% of China’s population now living in cities. Housing supply must fall by about 25% to match projected primary demand in 2031, according to Chang Shu, chief Asian economist at Bloomberg Economics. Core demand removes speculative buyers.

There is already a lot on offer after developers like Evergrande have borrowed madly in the last decade to build more apartments. Bloomberg Economics estimates that about 2.8 billion square meters of real estate is currently vacant — an area 47 times the size of Manhattan.

Even as Beijing takes steps to shore up the market, the government has stuck to its mantra that “houses are to live in, not to speculate” – suggesting there is no interest in going back to the starting era of the last decade. Ending unfinished homes is about reducing social unrest and protecting financial stability.

“Central authorities are likely to make some kind of public and credible commitment to ensure that housing construction will be completed to completion,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research Limited in London. “A few words from Xi Jinping that this is a political priority might do the trick.”

This calm is fueling bets that Xi will do more during his third term to ensure that China weathers the crisis. None of the economists surveyed by Bloomberg are calling for a recession anytime soon: The median estimate is that GDP will expand 5.1% in 2023, up from 3.4% this year.

“China as a country will weather the real estate downturn — it always does,” said Ann Stephenson Yang, co-founder of J Capital Research Ltd., which deals negatively with Chinese real estate. “But people will incur losses and the banks will be asked to cut the capital.”

Economists at Morgan Stanley recently tried to predict what would happen if Beijing slowed, modeling a stress test that would lead to just 1% growth in the first half of next year and 11 million jobs. The International Monetary Fund has painted its bleak picture of how a housing slump could turn into a banking crisis. In one scenario, 15% of small banks could collapse.

“All you can do is look at history and make an informed guess,” said Larry Hu, an economist at Macquarie Group Ltd, who last year predicted that Beijing’s hard-line policies would last until 2022. Down cycle? This is your new nightmare scenario.”

(Updates with IMF report in paragraph 11)

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