China New Construction Starts Sink to Almost 10-Year Low

The downturn in China’s property sector intensified in July with the biggest fall in new construction starts in almost a decade.

The property market accounts for about a quarter of the Chinese economy but has been in a prolonged crisis for the past two years with a swag of debt-laden developers defaulting on loans and bond repayments.

The crisis spurred originally by a government campaign to tighten credit for both buyers and builders in a bid to reduce huge debts in the sector. But consumer sentiment deteriorated in July, when buyers upset at unfinished homes in projects all over the country threatened to stage a mortgage boycott.

This has also chilled new property investment by developers, which fell by more than 12% year-on-year last month, widening from a 9.4% drop in June, according to calculations based on data from the National Bureau of Statistics (NBS) on Monday.

Property investment in January-July fell 6.4% from a year earlier, the most since March 2020.

In July, new construction starts by floor area fell at the fastest pace since January-February 2013 – down 45.4% – after a 45% slump in June.

In January-July, new construction starts tumbled 36%, extending from a 34.4% drop in the first half.

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Big Drop in New Home Loans

Cash-strapped real estate firms have suffered from tight credit conditions since August 2020, when Beijing imposed its ‘Three Red Lines’ policy to deleverage the sector and reduce the massive corporate debt of companies such as China Evergrande.

But the source of the crisis may be the excessive building spree funded by an endless amount of debt over the past decade, which left the country with over 50 million empty apartments, according to some reports.

For developers, loans granted by domestic banks dropped by close to 37%, while capital raised from abroad plunged 200% in July, according to calculations based on the NBS data.

Household loans, including mortgages, fell to 121.7 billion yuan ($18 billion) in July from over 848 billion yuan in June, the central bank said on Friday.

Reflecting the poor buyer sentiment, new home prices fell 0.9% on-year in July, the fastest pace since September 2015, and extending a 0.5% decline in June, calculations based on NBS data showed.

“The recovery may be gradual and bumpy, a significant improvement in developer funding conditions may require more and broader easing, and there is a need for more policy support to restore confidence in the property sector and contain potential tail risks,” analysts at Goldman Sachs said in a research note.