The road to recovery for China's property sector is expected to span multiple years, as China still faces the lingering aftermath of one of the largest recorded debt booms, explains Goldman Sachs Research's Kenneth Ho, Asia credit strategist, on Goldman Sachs Exchanges. But even as the country works to rein in an estimated $8.4 trillion in mortgage and property developer outstanding debt, Ho doesn't expect the leverage to result in a financial crisis as past housing crises have done in other countries. "Policymakers in China [are] very focused on making sure systemic risks don't emerge," Ho says.
But there are risks that make this crisis different from prior downturns. One is the growing role of the secondary market: the buying and selling of existing homes. While the Chinese government can control many aspects of the primary market, from setting land prices to controlling developers' sales, it has far less control over what happens in the secondary market, explains Goldman Sachs Research's Yi Wang, who leads the China real estate team. "Because this is all consumer behavior, it's very difficult for them to control," she says. The secondary market is where Wang sees further deterioration, as the supply of homes rises and prices fall.
The impact of the downturn is far-reaching. "When you have this large segment of the economy contracting — and it's going to take years to get back to normal — your potential growth takes a big hit," says Goldman Sachs Research's Hui Shan, chief China economist, who estimates China's potential growth at around 4%. The property downturn will also hit commodity markets. "Before the downturn, Chinese copper demand, just in the property sector, was even more than the entire copper demand from the US," Hui notes. |
