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Analysis-China sees property silver lining but can’t shake Japan comparisons


A sharp decline in new housing construction in China is raising hopes that the beleaguered property sector is finally addressing its chronic oversupply issue. However, the absence of a comprehensive strategy to clean up bad assets keeps fears of prolonged stagnation, similar to Japan’s experience, alive.

China’s current situation mirrors the U.S. and Spain’s late 2000s property crises, with new housing construction now less than half its 2021 peak. Analysts suggest this could mean home building activity may bottom out within a year, potentially easing the real estate sector’s drag on economic growth.

“It’s reasonable to expect that construction will stabilize soon,” said Logan Wright, a partner at Rhodium Group.

New home starts in China fell by 63% from their peak to 634 million square meters (7.46 billion square feet) in the 12 months through April. The International Monetary Fund (IMF) estimates that fundamental demand for housing in China will average 950 million square meters annually over the next decade. Considering the need to absorb China’s massive existing inventory, the IMF projects new housing starts to average 715 million square meters, slightly above current rates.

This stabilization could signal that real estate investment, which JPMorgan estimates has reduced China’s economic growth by 1.5 percentage points annually over the past two years due to steep declines, is nearing a floor. George Magnus, a research associate at Oxford University’s China Centre, believes this could happen by 2025 or even sooner.

“There is potential for a cyclical rebound, even while we’re talking about medium-term shrinkage,” Magnus said.

Japan’s Footsteps

Property investment is expected to shift more towards affluent coastal areas. In the first four months of the year, Shanghai and China’s richest provinces—Zhejiang, Jiangsu, Guangdong, and Shandong—accounted for 49% of investment, up from 39% five years ago.

However, this is where the positive outlook ends and comparisons with Japan’s 1990s stagnation begin. Wright estimates that the real estate industry, once accounting for about a quarter of China’s economic activity, will stabilize at 40-50% of its peak levels and will no longer drive growth.

Prices have not fully adjusted, and negative financial impacts will persist. Official data shows new home prices in China have fallen by 11%, with JPMorgan estimating similar declines for older apartments.

In the U.S. and Spanish downturns that began in 2006-07, home prices plunged 30-40% from peak to trough over more than five years. Japan’s correction took over 18 years, with prices ultimately falling by 47%. So far, China’s pace has matched Japan’s, and analysts expect this trend to continue.

Both China and Japan have delayed recognizing losses. Japan slowed price declines by having banks purchase land, while China limits how much developers can reduce new home prices and implements other support measures. JPMorgan analysts describe this as an intentional strategy to mitigate financial spillover risks.

China’s developers still hold a significant stock of unsold homes, equivalent to nearly twice the size of London, and their debts are carried by banks and other institutions. In contrast, the U.S. used its Troubled Asset Relief Program to absorb toxic assets, while Spain created a bad bank.

Protracted Adjustment

China is reluctant to implement sweeping bailouts, according to a policy adviser who requested anonymity. “The government has no intention to prop up the property market,” the adviser said. “It aims to stabilize it, or at least slow down its decline.”

In May, China introduced a new support package for the sector, cutting mortgage rates and downpayments and instructing local governments—already $9 trillion in debt—to buy some unsold apartments and convert them into affordable housing. Analysts believe these purchases transfer bad assets from developers to local governments, delaying the necessary writedowns. Eventually, these losses will have to be acknowledged, which is why comparisons to Japan’s lost decades persist.

Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis, suggests that local governments might face similar challenges to Japanese banks, which ultimately required recapitalization, implying a “longer, more protracted adjustment.”

“There hasn’t been a clean-up,” Garcia-Herrero said. “This is why China looks more like Japan and not like the U.S. or Spain.” She added, “I do not think China’s housing prices will ever be higher on average. Tier 1 cities, maybe,” referring to Beijing, Shanghai, Shenzhen, and Guangzhou.

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