Demand for new housing in China will fall by 50% in the next decade

BEIJING – Demand for new housing in China is expected to fall by about 50% over the next decade, making it difficult for Beijing to act quickly to boost the country's overall growth.

That's according to the latest IMF staff report on China, which was completed in late December and released on Friday.

The IMF said it expects China's “underlying demand for new housing” to decline by 35% to 55% due to a decline in the number of new urban households and a large stock of incomplete or vacant properties.

The report said that slowing demand for new housing will make it difficult to absorb excess inventory, which “prolongs the adjustment period in the medium term and impacts growth.”

The real estate sector and related industries in China represent about a quarter of the country's gross domestic product. The latest decline in the real estate market follows a crackdown launched by Beijing in 2020 on developers' heavy reliance on debt for growth.

Chengxin Zhang, China's representative to the International Monetary Fund, said in a statement issued on January 10 as part of the organization's report released on Friday that the prediction of a nearly 50% decline in new housing “overestimates the potential market contraction.”

Zhang said that the demand for housing in China will remain large, and political support will begin gradually.

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

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

China's real estate sector has grown rapidly over the past few decades, prompting authorities to warn against betting on high prices and stress that “housing is for living in, not for speculation.”

The IMF noted that in the 2000s, the share of residential investment in China's GDP was close to or above the peak levels of real estate booms in other countries in the past.

“The significant correction in the real estate market, following government efforts to contain leverage in 2020-21, was justified and should continue,” the IMF report said.

The past three years have also seen debt-laden developers, from Evergrande to Country Garden, default on US dollar-denominated debt held by outside investors. This week, a Hong Kong court ordered Evergrande's liquidation.

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

“It is important for the central government to provide more financing to complete the unfinished housing stock,” Sonali Jain Chandra, IMF mission head for China and Asia-Pacific, told reporters on Friday.

“This was another factor hindering confidence in the market,” she said.

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

The International Monetary Fund indicated that the Chinese authorities consider the financial position in 2023 “proactive” and will maintain this position next year.

“The authorities are developing a policy package to prevent and solve the problem [local government] “Debt risks,” the IMF report said. When asked, Jane Chandra said she had no details about the expected scale of these measures.

The People's Bank of China announced last week that starting February 5, it will cut the reserve requirement ratio, the amount of cash banks must hold, by 50 basis points. This was the largest reduction of its kind since 2021.