The real estate sector in China is facing a grim period as house prices start to see a monthly drop in some major cities.
Of the 70 largest cities in China, there had been 36 of them with plummet price values, an expanded number from 16 cities in August, according to Nikkei Asia which reported from data published by the National Bureau of Statistics Wednesday, Oct. 20.
As of September, the average property values continued to fall 0.5% further, unveiled by Goldman Sachs after accounting for seasonal changes.
This figure could mean a challenging blow to China’s economy, which just earlier on Monday was disappointed by 4.9% annual GDP growth in the third quarter, far below economists’ expectations.
Financial Times highlighted these significant changes in house costs had not been seen since 2015. The month-on-month drop in pricing levels is also the first in China since the COVID-19 pandemic began.
As the country’s real estate sector weakens in the third quarter, more enterprises are falling short of making loan payments.
Evergrande of the Evergrande Real Estate Group, the most indebted property developer of the world in China, missed bond payments over the past weeks, according to the FT.
Nikkei Asia reported that the company was also forced to postpone construction across the country because of the late payments to contractors.
Sinic Holdings (Group) also could not repay a $250 million bond due on Monday, adding to the expanding list of defaults, which included smaller firms.
This significant real estate dilemma will pose some challenges to Beijing’s effort in countering asset bubbles.
Real estate developers in China frequently offer residential buildings through so-called prepayments, in which clients purchase homes before they are built.
Since companies are failing their bond payments, customer interest in the sector consequently is damaged.
“The policy direction of deleveraging the property sector is unlikely to shift which could continue to weigh on growth next year,” Goldman analyst Helen Hu said on Wed., as Nikkei Asia quoted.
Oxford’s Kuijs said this current crisis proves China needs to divorce itself from being dependent on real estate for economic growth.
“There are signs that the government is becoming more serious about the need to reduce the role of real estate over time,” Kuijs said. “We expect real estate to contribute much less to growth over the medium and long term than in recent decades.”