Investors were pouring into the sleepy city of Shangrao in southeastern China until late last year to scoop up apartments as new high-rise projects mushroomed.
Then sentiment turned. Unsold units started piling up and developers began cutting prices. Homeowners fearing a housing-price collapse protested at one sales office in October.
The deepening slump, visible as well in other smaller Chinese cities, illustrates why property sales aren’t expected to help bail out China’s economy as overall growth slows this year.
In the past, China relied heavily on property investment to patch over weak spots in the economy.
That was especially true in 2015, when a sharp drop in China’s stock market and other issues left officials worried about a possible major slowdown. Authorities lowered interest rates and lifted home-purchase limits to steer credit into property, boosting sales and the broader economy.
This time, Beijing is trying to avoid a repeat. Officials express deepening concern with financial risks from years of rising property debt, as well as social discontent in cities where homeowners have much of their wealth tied to property values and young people fear prices have soared out of reach.
They are declining, so far, to expand a key government program that offered cash subsidies to rural villagers to buy apartments in dozens of cities across the country, largely because officials don’t want to add more debt to the financial system.
Demographic forces are also starting to dampen housing-market momentum. Slowing urbanization means fewer rural residents are moving to cities, softening demand for new properties, while a graying population means there are fewer young families looking to upgrade homes.
Home prices are falling in some places. In a suburb of Beijing, 29-year-old Zhang Jianhua said he pays two-thirds of his monthly income from a job making soup dumplings to cover his mortgage for an apartment. Prices in his area dropped 20% from last year, and recently, Mr. Zhang joined 200 other homeowners at the central housing ministry to protest.
“I felt like I had no other choice but to protest,” Mr. Zhang said. “I’ve been so upset.”
China’s property market is still healthy in many areas. Home prices nationwide were up 10.6% in December from a year earlier, compared with 10.3% in November.
In bigger markets like Beijing and Shanghai, housing demand is likely to be sustained by inflows of people looking for better jobs, so long as China’s economy doesn’t fall into a major recession.
But some economists believe sales figures are getting a temporary boost as developers aggressively push properties in expectation of a worsening property downturn this year. Many developers are facing a mountain of debt coming due in 2019.
And concerns are deepening about the outlook for smaller cities, where population growth is slow or shrinking, economists say.
Smaller cities had recently been the most dynamic markets in the country, making up nearly two-thirds of national property sales last year, compared with one-half in 2016, according to an analysis by S&P Global Ratings.
That is largely due to the cash subsidy program, designed to help rural residents improve their housing and create opportunities for developers. The program contributed as much as a fifth of China’s housing sales last year.
It also means many would-be buyers have already purchased properties, taking away demand from the future, said Julian Evans-Pritchard, a senior China economist at Capital Economics, who added that demand for urban housing likely peaked in 2015.
Under terms of the subsidy program, smaller cities borrowed extensively from state banks to tear down dilapidated housing and give money to villagers to buy newer homes. Economists say it is unclear how those debts will be repaid. According to government plans, subsidies are allocated for only 4.6 million home purchases this year, down more than 20% from last year.
Shangrao is emblematic of the smaller Chinese cities whose property sales contributed to economic growth in recent years.
A city of six million people in Jiangxi province, its economy is based mostly on agriculture in the surrounding rural countryside under its administrative control. Property investment rose 16% in 2017, and housing prices doubled, largely thanks to the government subsidy program.
“After people’s homes got demolished, they had to buy another apartment, which created demand out of thin air,” said Cao Guoxin, a professor at Jiangxi University who studies the regional housing market. Now that program is ending in Jiangxi province, he added.
China’s Ministry of Housing and Urban-Rural Development and the housing ministry of Jiangxi province didn’t respond to requests for comment.
Shangrao home prices are 11% off their peak last May, according to Anjuke, a Chinese property brokerage that compiles home price data. On a recent weekend, local developer Youbang Real Estate was pulling out all the stops to market the biggest project in the city, One Sino Park, with 5,500 units.
The company staged a fashion show in its sales office with women in fur-lined coats and qipao, a traditional Chinese dress, attracting an audience of about a hundred people. Posters pumped up the urgency to buy, with messages like, “You’ve got money but won’t buy a house? Isn’t that like watching your wealth disappear?”
At another project, built by Country Garden, one of China’s top three home builders by sales, a 54-year-old small-business owner who only gave his surname, Liu, said he had just signed the contract on a new apartment for when his 23-year-old son, a recent college graduate, gets married someday.
“I feel like Shangrao’s vacancy rate is already really high,” said Mr. Liu, who bought the home for 30% less than the advertised price. “A lot of my friends already hold two or three homes.”
The gloom of a slowing property market is spilling over into consumption, another key growth driver of China’s economy. Debt obligations are crimping household budgets, while stagnating property values make families feel less willing to spend.
Wang Lingling, 34, bought a home in Shangrao last October. She and her husband, who have two children, are struggling to pay 3,900 yuan a month for the housing loan because they work part-time jobs and don’t have fixed incomes. They say they don’t eat out as much anymore to save money.
“Now we have to think twice before buying things,” Ms. Wang said. “We must first put all our money toward paying the mortgage.”
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