Home sales in China are dropping by a third or more in some cases as curbs on property lending and worries about the financial health of China Evergrande Group EGRNF 5.56% and other developers are sidelining house buyers.
In recent days, numerous big developers have reported lower sales figures for September, with many showing year-over-year declines of more than 20% or 30%. That is a stark drop-off for what is usually one of the strongest months in the year, thanks in part to promotions offered around China’s Oct. 1 National Day holiday.
If sustained, the sharp downturn could have serious economic consequences. China’s residential real-estate market, including construction activity and services, accounted for about 23% of gross domestic product in 2018, according to Goldman Sachs. Construction and real-estate services are important sources of jobs for both migrant workers and college graduates and land sales to developers provide about a third of the income that goes to local governments.
The sales slowdown was partly a result of tighter government policy on mortgages and waning confidence among home buyers, said Cheng Wee Tan, a senior equity analyst at Morningstar. Customers are worried that developers won’t be able to complete their projects and media reports about unfinished Evergrande constructions have added to those fears, he said.
Developers are also struggling to adapt to a series of changes, including rules dubbed the “three red lines” that were introduced last year to curb debt growth at financially weaker companies, as well as caps on banks’ property lending.
On Tuesday, Longfor Group Holdings Ltd. and China Resources Land Ltd. became the latest major real-estate companies to release weak data. In a filing to Hong Kong’s stock exchange, Longfor said September’s contracted sales totaled 20.2 billion yuan, or the equivalent of $3.1 billion. That was down nearly 33% from a year earlier, while China Resources Land reported a near-24% drop on the same basis.
The declines have been even steeper at some other major rivals, recent filings show, including a 34% drop at China Vanke Co. and a 42% fall at China Overseas Land & Investment Ltd. Evergrande hasn’t reported figures to Hong Kong’s exchange yet but warned on Sept. 14 that “ongoing negative media reports” had deterred home buyers, which would likely mean significantly lower sales in September.
The official corporate figures broadly tally with earlier data from CRIC, a Chinese data provider, which previously said total contracted sales among China’s 100 largest developers fell 36% year-over-year in September.
Falling sales could create stress at more developers, potentially preventing some from completing existing projects or forcing them to scale back future plans, said Logan Wright, director of China market research at Rhodium Group.
“If that continues, then the broader concern is whether some of the tightening measures come at the expense of the health of the entire sector,” Mr. Wright said. “You are going to see weaker financial conditions and weaker construction activities spilling out into the broader economy,” he said.
Lower sales could also prompt more developers—desperate to recoup cash to repay debt obligations—to offer bigger discounts, which could put downward pressure on housing prices.
Over the past month, officials from at least eight cities barred developers from making cuts to home prices that are deemed too sharp and in some cases instituted minimum prices, according to Chinese state media.
Goldman Sachs economists have estimated that a 15% drop in land sales and a 5% decline in property sales and home prices would knock 1.4% off China’s GDP next year. In a worst-case scenario, they said a 30% decline in land sales and a 10% drop in property sales from this year to next could depress GDP by as much as 4.1%, with the biggest impact coming from tighter financial conditions.
Write to Elaine Yu at [email protected] and Stella Yifan Xie at [email protected]
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