Property sector must shrink to be stable, says prof

A senior expert on China’s housing market said the Chinese real estate sector must be “significantly smaller” to keep the overall economy healthy and stable.

“We have very high risks in this sector. We have built a lot of housing, so stability must come first [from] “The sector is downsizing,” Lee Gan, professor of economics at Texas A&M University, told CNBC’s Street Science Asia on Wednesday.

Gan estimated that about 20% of housing stock in China is vacant as buyers collect second and third properties as investments. Until then, he said, developers continue to build millions of new units each year.

Chinese real estate developers have grown rapidly after years of excessive borrowing. Problems in this sector have come to the fore in the past few months as Evergrande and other developers have defaulted on bonds and are at risk of default.

Using the real estate sector to boost GDP growth is not… a sustainable path for China.

Lee Gan

Professor of Economics, Texas A&M University

The authorities in China have intensified their efforts to curb abuses in the real estate sector and curb speculation among homebuyers. procedures They include curbing rampant borrowing among developers and tightening mortgage lending rules.

Gan, who is also director of the Chinese Family Finance Survey and Research Center at Southwestern University of Finance and Economics in Chengdu, China, said there are indications that housing demand has slowed in China.

“I would say that some real estate companies will have to get out of the sector in order for the country and the sector to be healthy. So the Evergrande problem is just the beginning, and many companies will have to get out of the sector because the demand is no longer there,” Gann said.

Evergrande has liabilities of about $300 billion. Concerns about the company’s ability to repay its debts stunned Global investors who were concerned about the potential fallout for the rest of China’s real estate industry and economy.

Li Daokui, a former adviser to the People’s Bank of China, told CNBC last month that Evergrande could potentially be “dissolved” into four major groups.

New home prices have stopped

New home prices in China have stopped For the first time since February 2020, according to Reuters calculations of the latest official data.

Reuters said average new home prices in 70 major Chinese cities were unchanged in September compared to the previous month. New home prices rose 0.2% month-on-month in August, the news agency said.

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Gunn said lower house prices will allow consumers to spend on other things, which will be healthier for the economy as a whole. He added that consumption is a key driver necessary to offset the slack in the Chinese economy.

Overall, Gan predicted that the contribution of real estate and related industries to China’s GDP could drop from about 30% currently to about 15%.

He added that the Chinese government would be able to engineer a gradual slowdown in the real estate sector to avoid a hard landing in the economy.

“Using the real estate sector to boost GDP growth is not … a sustainable path for China,” the professor said.

The slowdown in the real estate sector has affected China’s economic growth. The world’s second-largest economy on Monday reported a disappointing 4.9% expansion in third-quarter gross domestic product compared to a year ago.

– CNBC’s Evelyn Cheng and Wizen Tan contributed to this report.

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