- “We only expect an ‘L-shaped’ recovery in the real estate sector in the coming years,” the economists at Goldman Sachs wrote in a weekend statement.
- JPMorgan’s Tai Hui told CNBC, “I think the recovery will be slow, but I think there’s also a lot of divergence between government developers and private sector developers.”
- Morgan Stanley warned in its mid-year outlook report that further weakness in the real estate sector is likely to create more headwinds for China’s growth.
NANNING, CHINA – MAY 17, 2023 — A residential commercial property is seen in Nanning, south China’s Guangxi Zhuang Autonomous Region on May 17, 2023.
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Wall Street banks have warned that weakness in China’s real estate sector could weigh on the economy for years to come, even affecting countries across the region.
“We see persistent weaknesses in the real estate sector, primarily related to smaller cities and private developer financing, and believe there appears to be no quick fix,” Goldman Sachs economists led by Chinese economist Lisheng Wang said in a weekend statement.
Goldman economists said the housing market is expected to experience an “L-shaped recovery” — defined as steep declines followed by a slow rate of recovery.
“We only see an ‘L-shaped’ recovery in the real estate sector in the coming years,” they said.
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Economists at Goldman Sachs also noted that the Chinese government is expected to roll out more housing stimulus packages to support the sector.
“We believe the policy priority is to manage the multi-year downturn rather than create a recovery,” the analysts said, adding that Goldman does not anticipate “a repeat of the 2015-18 cash-backed slum rehabilitation program.”
They were referring to China’s urban renewal project, which aimed to renovate millions of run-down homes over an extended period of time to boost urbanization and improve living conditions.
According to Portal, the government spent about $144 billion in the first seven months of 2018 to compensate residents of demolished homes in a bid to boost home sales and prices in smaller cities struggling with unsold homes.
Another concern for the real estate sector is the wide divergence between state-owned real estate companies and private companies in the sector, said Tai Hui, Asia chief market strategist at JPMorgan.
If challenges in the real estate sector intensify and lead to risk aversion in the financial system and affect consumer confidence, this will lead to a stronger slowdown in China.
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“I think the recovery will be slow, but I also think there’s a big divergence between the government developers who have done better in this current recovery and the more private sector developers who are still struggling.” , Hui told CNBC. Squawk Box Asia” on Tuesday.
The real estate sector was also highlighted in a government work report released earlier this year, which called for helping people buy their first homes and “helping solve the housing problems of new city dwellers and young people”.
Hui said the government’s push to cap house prices at a certain level could result in losing a large chunk of potential buyers.
“While the authorities have eased some of their guidelines over the past six to nine months, I think the intent to maintain price affordability is the basis out of the equation,” he said.
Morgan Stanley warned in its mid-year outlook report that further weakness in the real estate sector is likely to create more headwinds for China’s growth.
“As challenges in the real estate sector intensify, causing risk aversion in the financial system and hurting consumer confidence, it will lead to a deeper slowdown in China,” wrote Chetan Ahya, Morgan Stanley’s chief economist.
Should monetary easing fail to support the struggling real estate sector, it will also raise concerns about a spillover effect to the rest of the Asia-Pacific region, the company’s economists said.
A “downside risk is that China’s real estate sector will not stabilize despite the easing we expect,” they said. “In this scenario, China’s confidence and financial conditions will tighten, which will have a direct impact on China’s growth, but will also have a negative impact on the region.”
– CNBC’s Evelyn Cheng contributed to this report.