IMF expects new housing demand in China to drop by around 50% in the next decade

Pictured here is a real estate project under construction in Huai’an, China, on Jan. 21, 2024.

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BEIJING — Demand for new housing in China is set to drop by around 50% over the next decade, making it harder for Beijing to quickly bolster the country’s overall growth.

That’s according to the International Monetary Fund’s latest staff report on China, completed in late December and released Friday.

The IMF said it expects “fundamental demand for new housing” in China to fall 35% to 55% due to a decline in new urban households and a large inventory of unfinished or vacant properties.

Slowing demand for new housing will make it more difficult to absorb excess inventory, “prolonging the adjustment into the medium term and weighing on growth,” the report said.

China’s real estate sector and related industries have accounted for about a quarter of the country’s gross domestic product. The latest property market slump follows Beijing’s crackdown in 2020 on developers’ high reliance on debt for growth.

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The prediction for a roughly 50% drop in new housing “overestimates the possible market downturn,” Zhengxin Zhang, China’s representative to the IMF, said in a Jan. 10 statement included in the organization’s report released Friday.

Zhang said China’s housing demand would remain large, and policy support would gradually kick in.

“Therefore, a significant decline in housing demand is very unlikely to happen,” he said. “The rationality of the base period selected is also debatable.”

The IMF report compared housing demand and new starts from the 2012 to 2021 period with estimates for 2024 to 2033.

China’s real estate sector grew rapidly over the last few decades, prompting authorities to warn against betting on a price surge and emphasize that “houses are for living in, not for speculation.”

The IMF pointed out that in the 2010s, residential investment’s share of GDP in China was near or above the peak levels of property booms in other countries in the past.

“The large correction in the property market, following government efforts to contain leverage in 2020-21, was warranted and needs to continue,” the IMF report said.

The last three years have also seen highly indebted developers from Evergrande to Country Garden default on U.S. dollar-denominated debt held by overseas investors. This week, a Hong Kong court ordered Evergrande to liquidate.

Since late 2022, Chinese authorities have taken steps to ease financing restrictions for developers and new homebuyers. However, central and local government efforts to support real estate have not yet significantly stalled a broader decline in the sector.

“It’s important for the central government to come in with increased financing to complete the uncompleted presold housing,” Sonali Jain-Chandra, mission chief for China, Asia and Pacific department, IMF, told reporters Friday.

“This has been another factor holding back confidence in the market,” she said.

Consumer confidence has dropped amid uncertainty about future income. Chinese stocks have also fallen so far this year.

‘Proactive’ fiscal policy

The IMF noted Chinese authorities viewed the fiscal stance in 2023 as “proactive” and would maintain such a stance in the year ahead.

“The authorities are developing a policy package to prevent and resolve [local government] debt risks,” the IMF report said. When asked, Jain-Chandra said she did not have details on the expected size of those measures.

The People’s Bank of China announced last week that effective Feb. 5 it would cut the reserve requirement ratio, the amount of cash banks have to hold, by 50 basis points. It was the largest such cut since 2021. 

“We think this is a move in the right direction, but we think additional monetary policy easing is needed, especially the policy rate instrument,” Nir Klein, deputy mission chief for China, Asia and Pacific department, IMF, told reporters Friday.

“At the same time, we think China needs to implement some monetary policy reforms,” he said.

Slower GDP growth expected

China’s economy grew by 5.2% in 2023, according to official figures released last month.

That’s less than the 5.4% the IMF had predicted as of December, a miss that Jain-Chandra said was due to “weaker than expected consumption in the fourth quarter.”

The international lender predicts China’s growth will slow to 4.6% this year.

The IMF’s analysis found that moving supply chain production — either back to the home country or to allied countries — could lower GDP growth by about 6% in China and 1.8% globally.

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Looking ahead, the IMF expects inflation to tick higher this year to 1.3%, and noted falling energy and food prices were the main reasons for the drag on prices in 2023.

The core consumer price index, which excludes food and energy prices, rose by 0.7% last year, more than a 0.2% increase in overall CPI.

The IMF report pointed out that housing has boosted inflation in other countries, but in China, the real estate slump has weighed on prices.