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Timing is everything in life and right now happens to be one of the worst times to be a home builder in China. After going on an aggressive building spree that sparked the Chinese economy, Reuters reports that new home prices fell at the fastest rate in eight years. This revelation exacerbates the concerns about debt and oversupply that have brought several of China’s most prominent real estate developers to their knees.

This situation is of concern because of the real estate market’s importance to China’s economy. By some estimates, China’s real estate sector is responsible for nearly 25% of the country’s economy. The first signs of trouble came in 2021 when the government restricted access to credit for China’s largest real estate developers. Although stabilizing the economy was the motive for the move, it had the opposite effect.

China’s real estate developers and major economic sectors are just as dependent on access to credit as their American contemporaries. Developers lose access to the capital they need to complete their projects when credit is restricted, lending standards tighten and interest rates rise. Many analysts blame this credit crunch for the Chinese real estate sector’s weaker-than-expected results in early 2023.

Reuters cites data from China’s National Bureau of Statistics showing new home prices in March were down 2.2% compared to the previous year. That’s the largest year-to-year drop in prices since August 2015. It’s also worse than the February 2024 numbers, which showed a 1.5% decline. That’s a sector-wide drop of nearly 4% in just sixty days. The price drops are affecting all of China’s cities.

China groups its cities into three separate tiers, and price declines have worsened in all three tiers. The central government is concerned about that trend because the country had better-than-expected GDP growth for the first quarter of 2024. That means other Chinese economic sectors are making more money but home prices are still dropping. Normally, GDP growth is a predictor of real estate sector profits.

The Chinese government has taken numerous measures to breathe life into the real estate industry, including removing barriers that keep citizens from buying homes and encouraging lenders to speed up loan approvals for real estate developers. However, buyers remain skittish because of doubt that cash-strapped developers will finish their new projects on time or at all.

Instead, the opposite is happening in China. Even as China’s GDP grows, the real estate sector is dragging the economy down. The damage wrought by the real estate sector’s troubles would have been even more severe without better-than-expected GDP numbers. Economic experts and analysts expect the situation to get worse before it improves.

Woei Chen Hoe, an economist for Singapore-based United Overseas Bank (UOB) said as much in a recent interview with Reuters, where he opined, "There’s not much of an improvement in the outlook from here. I think there are still downside risks to the economy. It’s pretty clear the property glut is still continuing.”

Moody’s Analytics economist Harry Murphy Cruise recently wrote a company research memo forecasting continued troubles. He said, “Absent the monster spending splurge of years gone by, real estate investment, dwelling prices and new dwelling sales are set to fall throughout 2024.” That kind of pessimistic outlook is the opposite of what anyone connected to Chinese real estate development wants to hear.