Chinese property brokers despair as homebuyers sit on sidelines

Since the end of China’s zero-Covid policy late last year, real estate agent Wu Hong has been so busy hunting for a new leader that he no longer has time to play cards with his friends. “Now I spend so much time talking to clients that I often feel a pain in my throat,” Wu said.

But his hard work didn’t translate into sales. Sales of newly built homes in Wuhu, a city in eastern China about 300km from Shanghai, rose 10 percent last month from 448 properties in December. But that remains down almost two-thirds from the 1,341 properties sold in January 2022.

The real estate recovery in Wuhu underscores the challenge for China’s policymakers to stimulate the country’s property market, a critical growth engine that has slowed over the past two years under government and Covid-19 control.

Even by the standards of other Chinese cities, Wuhu has houses that are not selling very well, said a person briefed on the matter.

“Homebuyers are back,” said an executive at a developer with a project in Wuhu. “But they are more cautious when making decisions because they fear that prices, which have weakened, will fall again.”

China’s real estate sector is estimated to account for about 30 percent of total economic output and is linked to local government finances, which last year generated Rmb6.7tn ($990bn) – or a third of total fiscal revenue – from land. sales for developers.

But the government’s restrictions on the high level of influence in the sector intended to limit speculation and risky credit – known as the “three red lines” policy – have created a hunger for cash, driving some into default, freezing projects and sending house sales and plunging prices.

Sales of newly built homes in China’s 30 major cities are expected to drop 31 percent in 2022 and continued to decline last month, according to Wind, a financial data provider.

In Wuhu, the average price of 90 sq m was about Rmb900,000 ($133,000) last month, still down five times from the previous year,

Even if the country reopens and the government eases leverage restrictions to boost growth, “the economic fundamentals are too weak to support a dramatic turnaround in real estate”, said Bo Zhuang, an economist in Singapore at Loomis Sayles.

That has prompted developers to take aggressive steps to revive sales. Instead of sticking to the state-imposed price floor – introduced to maintain local government revenue – Golden Scale House, a housing project in the suburbs of Wuhu, has given a renovation subsidy of Rmb230,000 one month after the sale was completed.

While sales tripled in January, GSH officials said the project was barely profitable after the discount, which is about 20 percent of the average price of a three-room apartment.

“We have a very bad 2022,” said the person, who requested anonymity. “We need to generate cash flow to survive.”

Elderly residents of Wuhu are also at fault for falling house prices. Like many friends on the mainland, this city in recent years has faced an influx of youth, the main source of demand for new homes.

“Twenties would rather rent a basement in Shanghai and have a future than stay with their parents and work 12 hours a day in a factory here with little growth potential,” said an official at the city’s Jiujiang District Labor Market.

At No 1 Park Avenue, a popular residential compound in the suburbs of Wuhu that was completed and sold seven years ago, more than 10 percent of the apartments have never been occupied, according to internal documents from the local homeowners’ association. Brokers said many were bought as investments in the hope that prices would rise.

Wuhu’s local government is eager to get the market moving again, announcing a host of incentives from the second half of 2022 including home purchase subsidies worth up to a 10 percent discount.

“How do you expect new home prices to go down when there are so many existing homes to get discounted prices?” said the developer with operations in Wuhu.

Local home buyers expressed caution. “There is no need to rush when the market is still weak,” said Li Hui, a 30-year-old office worker in the city who has been hunting for a three-bedroom flat for three months.

Local authorities are also involved in encouraging the sale of land, which the government relies on to make ends meet. Last month, the Wuhu city finance bureau set a 20 percent growth target for land sales this year.

Developers remain unsure. “It will take a long time for confidence to be restored,” said the executive in the Wuhu developer, which has no plans to expand in the city. “We’re still a long way from there.”