China’s once highly competitive and growing property market has been slowing down recently. This drop has caused worry not only in China but all over the globe since China is a global economic region. Once the prices of housing began to rise in China, the construction of apartments began at a very fast pace.
Now, the market is struggling, and it has become important for investors to investigate the factors that led to this decline in order to fully adjust and continue the real estate business. Homeowners also need to understand when the trend will take a turn and allow them to realize the value of their investment.
This article will discuss the cause of the downward trend in the Chinese property market and its economic effects.
Factors Behind the Property Market Slump
A number of reasons have led to the drop in real estate prices in China. Here are some probable causes of the slowdown in property markets in this Asian and first-world country.
Government Policy Changes
Changes in real estate policies are one of the major causes of the current drop in the property market. The Chinese government has implemented policies to dampen the hot property market. These policies were meant to ensure the market was not overhyped and could sustain itself profitably.
The government reduced borrowing opportunities, thus limiting people’s ability to secure loans to purchase property. That entailed placing caps on how much money banks could advance to people purchasing homes or real estate agents. Through these measures, the government aimed to limit the money supply in the property market so as to curb further price escalation.
Increased Supply of Housing
Overcapacity or surplus of housing has been identified as one of the major reasons for the downturn. During the housing boom, many developers produced large quantities of new apartments, some of which were in the cities but were not in high demand as expected. There were situations where neighboring houses were constructed, but people did not live in them, and became ghost cities.
In such areas, supply greatly outstripped demand, leading to a standstill or even a decline in property prices. This oversupply issue has remained a challenge for developers when selling new homes, slowing down their financial situations and the overall market.
Rising Cost of Fittings
Although China’s economy has been expanding in the last few decades, the speed has decreased in the last few years. The increasing cost of living has dampened people’s monetary power to buy a home, construct one and even improve the status of their current homes. Additionally, most individual constructors have been finding it difficult to start new projects due to the high cost of construction materials and fittings.
Hence, most homeowners and contractors are looking for alternative sources of construction items. One of the cost effective ways has been to procure from online shops those house fittings that are rather expensive locally, such as bathroom mixers, kitchen fittings, and hand tools. While the quality is the same or better, these online stores have provided relief in terms of pricing and variety, easing the cost of construction.
Loss of Confidence
Previously, Chinese homebuyers assumed that property prices were only heading upward. However, as the market slows and prices creep downward in certain regions, people are now more wary of investing in property. This decline in confidence has resulted in a reduced rate of investment, with people shifting their interest away from the real estate sector.
Besides, first-time homeowners, developers, and investors have also developed a loss of confidence in the market. An increasing number of developers are still over-leveraged, and some have failed to finish construction projects, which results in buyers receiving incomplete houses.
The Impact of the Slump
The Chinese property market has been considerably affected, and its repercussions are not only limited to China but to the entire world. Most developers embarked on massive constructions with funds borrowed from commercial banks in the belief that property prices would continue rising and give them good returns.
However, with the emergence of the ‘subprime’ market, these companies realized they could no longer sell homes or make enough money to pay off their debts. Some large-scale developers have encountered serious cash problems, which has raised concerns about insolvencies and failures.
Many homeowners who invested in real estate during the early years are now in a very unfavorable situation. The market price of homes is lower than the original purchase price, which has led to a scenario where people are held captive in their homes because they cannot sell them without incurring serious losses.
Finally, real estate is one of the largest industries in China, and it has long contributed significantly to the growth of the Chinese economy. As the sector declines in any fiscal year, so does the whole economy. This slower rate has led to reduced economic growth rates, unemployment, and less consumer expenditure.
However, investors in this sector are still hopeful that the trend will not continue for long, to prevent capital flight to the neighboring countries with a higher demand for real estate development.
