China’s real estate slump predicted to last for years, threatening to spill into the wider region

Weakness in China’s real estate sector could be a drag on the economy for years to come and could even impact countries in the wider region, Wall Street banks have warned.

“We see persistent weaknesses in the property sector, mainly related to lower-tier cities and private developer financing, and believe there appears no quick fix for them,” Goldman Sachs economists led by China economist Lisheng Wang said in a weekend note.

Goldman’s economists said the property market is expected to see an “L-shaped recovery” — defined as steep declines followed by a slow recovery rate.

“We only assume an ‘L-shaped’ recovery in the property sector in coming years,” they said.

“Based on our estimates, the property weakness will likely be a multi-year growth drag for China, but it could be less painful in 2023 than in 2022.”

Data from May showed China’s property sector is still struggling to turn around, despite signs of recovery earlier this year.

Market watchers predict China will likely support the real estate sector through fiscal stimulus policies, expected to be released as the economy struggles to regain momentum after reopening from Covid-19.

Hong Kong-listed Chinese property stocks jumped Tuesday after the People’s Bank of China cut its seven-day reverse repurchase rate by 10 basis points from 2% to 1.9% — it was the first such cut since August.

On Tuesday, property developer Logan Group jumped as much as 4.5% and Country Garden rose 4% on hopes of further stimulus and policy easing ahead.

Goldman Sachs economists also noted there are expectations for China’s government to introduce more housing stimulus packages to support the sector.

“We believe the policy priority is to manage the multi-year slowdown rather than to engineer an upcycle,” the analysts said, adding that Goldman does not expect “a repeat of the 2015-18 cash-backed shantytown renovation program.”

They were referring to China’s urban redevelopment project which aimed to renovate millions of dilapidated homes over a period of time to drive up urbanization and improve livelihood.

According to Reuters, the government invested some $144 billion for the first seven months of 2018 to compensate residents of homes that were demolished in a bid to boost home sales and prices in smaller cities struggling with unsold homes.

Another concern for the property sector is a wide divergence between government-owned property businesses and private companies in the industry, JPMorgan’s Asia Chief Market Strategist Tai Hui said.

“I think that recovery is going to be slow, but I think there also a huge divergence between the state-owned developers which have done better in this current rebound versus the more private sector developers, who are still struggling,” Hui told CNBC’s “Squawk Box Asia” on Tuesday.

The property sector was also highlighted in a government work report released earlier this year, which called for support for people buying their first homes and to “help resolve the housing problems of new urban residents and young people.”

Hui said the government’s push to cap property prices at a certain level could be missing a big chunk of potential buyers.

“While the authorities have been relaxing some of their policies in the past 6 to 9 months, I think the intention to maintain price affordability, i.e., not let prices go up too much … that’s really taking a big part of the potential buyer base out of the equation,” he said.

Morgan Stanley, in its mid-year outlook report, warned that further weakness in the property sector will likely bring more headwinds for China’s growth.

“If the challenges in the property sector deepen and bring risk aversion in the financial system and affect consumer confidence, this will cause a deeper slowdown in China,” Morgan Stanley’s chief economist Chetan Ahya wrote.

Should monetary easing measures fail to support the ailing property sector, it will also lead to concerns of a spillover effect in the rest of the Asia-Pacific region, the firm’s economists said.

A “downside risk would be if China’s property sector does not stabilize even with the easing we expect,” they said. “In that scenario, confidence and financial conditions will tighten in China, which will have direct implications for China’s growth but also will negatively spill over to the region.”

– CNBC’s Evelyn Cheng contributed to this report.