Demand for new housing in China will decline by 50% over the next 10 years

BEIJING — Demand for new housing in China is expected to fall by about 50% over the next decade, making it difficult for the Chinese government to quickly boost national growth.

That’s according to the International Monetary Fund’s latest staff report on China, completed in late December and released on Friday.

The IMF said China’s “underlying demand for new housing” is expected to fall by 35% to 55% due to a decline in the number of new households in urban areas and a large inventory of unfinished or vacant properties.

Slowing demand for new homes will make absorbing excess inventory more difficult, “prolonging the adjustment in the medium term and weighing on growth,” the report said.

China’s real estate sector and related industries account for about a quarter of China’s gross domestic product. The recent real estate market downturn comes in the wake of the Chinese government’s 2020 crackdown on developers’ heavy reliance on debt for growth.

IMF China representative Zhengxin Zhang said in a Jan. 10 statement included in an IMF report released Friday that predictions of a roughly 50% decline in new housing “overestimate the potential for a market downturn.” said.

Zhang said China’s housing demand remains strong and policy support will gradually take effect.

“Therefore, it is very unlikely that we will see a significant decline in housing demand,” he said. “The rationality of the selection of the reference period is also debatable.”

The IMF report compared housing demand and new construction starts from 2012 to 2021 with estimates for 2024 to 2033.

China’s real estate sector has grown rapidly over the past few decades, with authorities warning against betting on soaring prices and stressing that “housing is for living in, not for speculation.” There is.

The IMF noted that in the 2010s, China’s housing investment as a share of GDP was close to or above the peak levels of past real estate booms in other countries.

“The significant correction in real estate markets associated with government efforts to reduce leverage in 2020-21 is justified and needs to continue,” the IMF report said.

In the past three years, heavily indebted developers from Evergrande to Country Garden have also defaulted on US dollar-denominated debts held by foreign investors. This week, a Hong Kong court ordered Evergrande to go into liquidation.

Starting in late 2022, Chinese authorities have taken steps to ease lending restrictions for developers and new home buyers. However, efforts by central and local governments to support real estate have not yet significantly halted the sector’s widespread decline.

Sonali Jain Chandra, head of the IMF’s China and Asia-Pacific Department, told reporters on Friday: “It is important that the central government commits increased funding to complete the unfinished pre-sale homes.” Stated.

“This is another factor hindering market confidence,” he said.

Consumer confidence declined due to uncertainty about future income. Chinese stocks have also fallen since the beginning of this year.

The IMF noted that Chinese authorities view the fiscal stance in 2023 as “aggressive” and will maintain that stance over the coming year.

“Authorities are developing a prevention and solution policy package.” [local government] In response to a question, Jain Chandra said he did not have details about the expected scale of these measures.

Last week, the People’s Bank of China announced that starting February 5, it would cut the reserve requirement ratio, which measures the amount of cash held by banks, by 50 basis points. This is the largest reduction since 2021.

“We think this is a move in the right direction, but we think additional monetary easing, especially policy rate instruments, is needed,” Nir Klein, deputy representative for the IMF’s China and Asia-Pacific department, told reporters on Friday. I’m thinking about it,” he said.

“At the same time, we believe that China needs to implement monetary policy reform,” he said.

According to official statistics released last month, China’s economic growth rate in 2023 was 5.2%.

This was lower than the 5.4% the IMF had expected in December, which Jain Chandra said was due to “lower-than-expected consumption in the fourth quarter.”

International financial institutions predict that China’s growth rate will slow to 4.6% this year.

According to an IMF analysis, shifting supply chain production back home or to allied countries could reduce GDP growth by around 6% in China and 1.8% globally.

Looking ahead, the IMF expects inflation to rise to 1.3% this year, pointing to lower energy and food prices as the main reasons for lower prices in 2023.

The core consumer price index, which excludes food and energy prices, rose 0.7% last year, outpacing the 0.2% rise in the overall CPI.

The IMF report said that while housing is driving up inflation in other countries, the real estate recession is weighing on prices in China.