Ryan Woo and Liangping Gao

BEIJING, (Reuters) – Homeowners in Chinese small cities face a rare market downdraft. Buyers keep moving away from their property markets. This is eroding millions of people’s wealth and reducing consumer confidence in China’s second largest economy.

The latest statistics by China’s statistics bureau show that smaller cities are being hit by falling home values for the past seven months.

But this is just one part of the story.

Although the data from the bureau doesn’t fully reflect the situation in property, it does include the approximately 300 third-tier and lower-ranking cities as well as the smaller 2,000 county-level municipalities and 40,000 villages. Some estimates suggest that China’s population of 1.44 billion is composed mostly of small cities.

After a crackdown by the government on indebted developers borrowing new money, buyer sentiment has declined broadly since 2021. This triggered a liquidity crisis. Late last year saw a drop in national home prices for the first time since 2015.

Consumer confidence has been affected by the negative wealth effects of falling home prices, which have slowed consumer spending even on basics like clothing.

COVID-19-related epidemics, which locked down entire cities and disrupted local economies, have already caused severe damage to consumption. Retail sales nationwide fell for the first-time since 2020, while 31 of major cities saw record levels in joblessness.

Frederic Neumann (co-head of Asiaeconomics Research at HSBC Hong Kong) said, “For Chinese customers to come back fully forceful, not only will it need to vanquish the virus, but the entire property sector will have to revitalise as well.”

China’s small cities are home to a large proportion of property. A weak local market can lead to decreased consumer confidence and lower sales.

China’s first quarter saw an increase in consumption per person of 5.7% versus 17.6% during the prior quarter.

Homeowners who have mortgages, or are facing uncertainty in their job prospects, may already be trying to reduce spending.

Shi in Langfang, the home owner of a city at the tier-3 level in Hebei province south from Beijing said “I’d consider twice before I buy anything now”.

“We are also not traveling, we’re not visiting our parents in our hometown.”

Shi, who runs a salon and hairdressing business, purchased her house a few years back. She has seen her property’s value fall even though her monthly mortgage payment remains the same.

She said, “I am worried about my mortgage as the city is under lockdown since a while and (my) income is in the negative. Business is terrible.”

The private survey for 2019 revealed that only 22% of homeowners in low-tier areas had mortgages. That’s tens and millions of people. Only 41% of those who own no mortgages are vulnerable to the loss of their assets.

MORTGAGE PAINS

According to central bank officials, the outstanding mortgages were at 38.8 billion yuan (6.1 trillion USD) as of March 31, with the nonperforming mortgage ratio stable around 0.3%.

Officials stated that banks in more than 100 cities had reduced mortgage rates on average by 20-60 basis points from March.

Sun, 36-year-old delivery truck driver, stated that the home’s value in Linyi (tier-3 city in Shandong Province) had declined since 2021, while the rate of his mortgage payments was tied to its original valuation.

Sun, who has two children and is married, stated that he doesn’t desire the property. Sun has cut down on his purchases of clothing and cigarettes.

The fifth month in which new Linyi home prices saw no growth, March was the fifth of either declining or stalling growth, according to China Index Academy (a Beijing-based property institute).

Linyi’s home values have dropped to the mid-2021 level in value terms.

Over 60 million Chinese users have viewed social media posts tagged “postponing mortgage payment” in recent days.

NO DEMAND

The rise in home prices in low-tier cities was due to the construction of new homes by developers like Country Garden Holdings or China Evergrande Group.

These purchases were fueled by government payments in the thousands of Yuan per household as part of a national program to dismantle aging buildings and rebuild shantytowns.

In a market that is plagued with oversupply as well long-term exodus of people to areas more prosperous economically, analysts believe there are little chances of recovery.

End-January saw inventory levels of new homes for 66 cities in Tier-three and Tier-four at 270.39M square meters with a 21.09 month destocking cycle, according to China Real Estate Information Corp. (CRIC), an independent property consultancy.

This compares to 37,000,000 square meters in four cities of tier-one with a 11.33 month destocking.

Zhang Dawei from Centaline, the chief analyst for property agency Centaline said that there is no confidence in markets of lower-tier.

“Nobody dares buy a house.”

($1 = 6.3732 renminbi)

New home prices in 70 major Chinese cities (2021-2022) https://tmsnrt.rs/3vqA3ys

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