China's Housing Market: Revival on the Horizon?

China's recent shift to pro-growth policies is expected to finally lift its struggling housing market in the Year of the Rabbit. A much stronger 2023 seems assured, but the longer-term outlook remains uncertain at best.

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In a short space of time, Beijing has made an abrupt U-turn on almost every policy that had been clouding the economy for the past couple of years. Its strict "zero-Covid" policy is gone. The crackdown on powerful private enterprises, especially in the internet technology sector, has eased. And the campaign to curb property-sector indebtedness is also reversing.

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Beijing and local governments have been rolling out easier policies for months in hopes of arresting the sharp decline in property sales, but so far these efforts have been unsuccessful. rates and down-payment requirements have fallen, and some stronger private developers are now being allowed to raise debt and equity finance with far fewer hindrances.

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But the strict pandemic restrictions in China made it difficult for people to buy homes. The constant lockdowns and disruptions made it hard for people to plan for their future, and many people were hesitant to make big purchases.

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Now that the zero-Covid strategy has been dismantled, cash is expected to start flowing back into the property market. Unlike in advanced economies, Beijing didn’t make large cash payments to households during the pandemic. However, like many other countries, China’s savings rate increased during the past couple of years. These excess savings could boost consumption and some may be funneled into the property market.

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China's reopening has been messy, with skyrocketing Omicron infections. The Lunar New Year holiday will be in late January this year, which means a full rebound is unlikely to happen for a few months.

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Sales of property could start to rebound by the end of the year, after a sharp decline in the past year. According to data from the National Bureau of Statistics, the value of residential property sold in China fell by 28% in the first 11 months of 2020, compared to the same period last year. However, with the housing market showing signs of stabilizing, we could see a pick-up in sales in the coming months. Even after China overcomes its initial Covid-19 outbreak and households start spending more, the housing market is not likely to return to its pre-crisis levels from the past two years.

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There are a few factors at play here. For one, while stronger developers will likely muddle through the coming months, many weaker ones that overextended themselves during the boom years—including some massive whales like China Evergrande—won’t. Their unfinished projects—China developers usually sell homes before they are built—will continue to make many potential buyers edgy. State-owned developers like China Overseas Land & Investment will probably perform better than private ones as buyers look for more-certain delivery for their apartments. And speculative and investment demand will likely take longer to come back—although that will also depend on monetary conditions and how well competing asset classes, like equities, perform as the initial reopening jolt fades.

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A rapidly aging population is a serious longer-term structural problem for the housing market. Living space per capita has already reached a relatively high level, and in certain areas, especially some smaller cities, there are still too many unused apartments.

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China's long-suffering property market is expected to finally get some relief in 2023. However, it seems unlikely that it will ever again become the enormous structural growth driver it was for most of the past two decades. This will have a significant impact on future commodity markets and how China's growth affects the world.