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China grapples with severe housing bust

IMF says China's housing bust is occurring at "a historically rapid pace only seen in the largest housing busts in cross-country experience in the last three decades"

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China's ongoing housing bust won’t be short-lived, according to a report released by the International Monetary Fund on Friday.

By the time China’s housing bust, which started in 2021, bottoms out around 2026, the IMF predicts that China’s housing sector will contract by -45%. In the best-case scenario, the IMF projects that housing-related economic activity in China contracts by -30%. In the worst-case scenario, the IMF anticipates that housing-related economic activity in China contracts by -65%.

That’s a significant economic hit, considering that the IMF estimates that housing amounts to around 20% of China's economy.

“With the [China] property downturn in its third year, progress in downsizing the sector has been rapid in some respects. Housing starts have fallen by more than 60 percent relative to pre-pandemic levels, a historically rapid pace only seen in the largest housing busts in cross-country experience in the last three decades. Sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future,” wrote IMF researchers in the report.

While the U.S. housing market, particularly single-family housing, is considered underbuilt by most analysts, China’s property market is considered vastly overbuilt, with entirely empty high rises dotting some Chinese cities.

The rampant building in China, IMF researchers wrote, was driven “in part because consumers preferred to invest their considerable savings in real estate given the scarcity of attractive alternative savings options.”

In the years leading up to the housing bust, Chinese developers made risky bets believing the market would continue to boom.

"Expectations of continued increases in home and land prices allowed property developers to borrow rapidly," the IMF report states. That risk has caused spillover into China’s financial sector, similar to how the U.S. subprime crisis and subsequent housing bust from 2007-2012 caused a crisis in the U.S. financial sector.

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However, China’s government isn’t sitting idly on the sidelines. China has intervened to stave off several developer bankruptcies, and according to the IMF, Chinese home prices have “decreased only modestly in part because some cities have sought to limit price declines through rules and guidance on listing prices.”

The IMF suggests that a shorter bust for China’s real estate sector is possible if the country allows for a more market-based correction.

“A shorter and smoother transition for the real estate sector is achievable, however. Allowing more market-based adjustment in home prices and quickly restructuring insolvent developers will help to clear the overhang of inventories and ease fears that prices will continue to gradually decline. Rules allowing banks to avoid recognition of bad loans to developers should be phased out,” wrote IMF researchers.

China’s housing bust is also coming at less than an ideal time given the country's multi-decade period of worsening demographics.

“China’s housing market faces additional pressures in coming years from structural factors, in particular demographic change. The need for additional new housing will diminish in coming years as the population declines and urbanization slows. Large public subsidies in the previous decade helped millions of people move to newer housing from older buildings lacking modern amenities. Such [housing] demand will likely be more limited as depressed land sale revenues have tightened local government fiscal constraints and fewer residents live in older housing,” wrote IMF researchers.

Over the past 21 months, the U.S. housing market has slumped in the wake of a mortgage rate shock, occurring just after a period of overheating.

But that pales in comparison to the structural headwinds that China is staring down.

China continues to see sharp declines in home sales, home construction, and residential investment, along with falling home prices.

In the U.S., it appears that the worst of the housing slump could be behind us if the economy remains out of recession. While existing home sales remain at multi-decade lows, the U.S. homebuilding sector has noticed an improvement, and home prices are rising again in most regional housing markets.

Among the 30 largest U.S. housing markets, 26 markets have positive year-over-year home price growth. The only 4 negative major markets are Houston (-0.40%), Dallas (-0.51%), San Antonio (-3.29%), and Austin (-7.21%).

Click here to view an interactive version of the chart below

One more thing: On Tuesday, Bloomberg reported that institutional homebuyer Pretium has raised nearly $1 billion for a new fund to acquire rental homes from builders. It’s a build-to-rent play.