New Delhi, July 25: China's once booming real estate sector and a pillar of economic growth is rapidly losing its sheen with prices of new homes in several major cities nosediving. This could dent China's economic recovery at a time when it is just coming out of the stringent Covid 19 lockdown shock. Real estate sector accounts for about 30 per cent of China's GDP.
In June the average prices of new homes declined by 0.5 per cent year-on-year, following a 0.1 per cent drop a month earlier, data website Trading Economics revealed.
The problem is deep rooted. The non payment would impact the country's banking industry as the non-performing assets will pile up further. The shadow banking sector, which includes trust companies and is an important funding source for Chinese developers, will be hurt as well, Peterson Institute for International Economics (PIIE) said in a blog.
Though Beijing has started firefighting to stabilise the situation by asking banks to ease lending for property developers, confidence among home buyers is at its lowest. The authorities are even looking at carving out a scheme facilitating a freeze of mortgage payment by homebuyers who have not been handed over the apartments.
"There is a real crisis-like situation in China and the authorities are aware of this. They are taking all measures required to address this. But we will have to wait and watch to understand how things take shape in the coming months," a person engaged with the education sector in China told India Narrative.
The crumbling of real estate behemoths Evergrande Group last year and subsequently the fall of several other property giants have shaken up the market. Prices of new homes have been steadily falling for the last one year. While the demand for new homes, considered one of the safest investment options for the Chinese, have been surging until last year, developers continued to increase their debt levels.
The total debt level stood at about $5.2 trillion as of June 2021, according to financial services company Nomura.
Protests by home buyers have become rampant. Earlier this month thousands of home buyers announced on social media they would not pay their mortgage loans. The protests have intensified spreading across 100 cities in the country. China Briefing said that the homes in question were acquired through a pre-pay model, in which buyers acquire apartments that are unfinished - or in some cases have not yet broken ground - when the initial deposits are paid and developers are required to hand over the homes within a stipulated time frame.
But amid overly ambitious development plans, sky-high debt, and a tightening regulatory environment aimed at deleveraging the industry, many have failed to do so. "This has left some households making mortgage payments for several years before being able to move in," it said.
Will this be China's Lehman Brothers moment?
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