Demand for new housing in China is expected to plummet by approximately 50% in the coming decade, posing challenges for Beijing’s efforts to boost overall economic growth, according to the International Monetary Fund (IMF). The IMF’s latest staff report on China, published on Friday, highlights the projected decline in “fundamental demand for new housing” by 35% to 55%, attributable to a decrease in new urban households and a surplus of unfinished or vacant properties.
The slowing demand for new housing is poised to create difficulties in absorbing excess inventory, thereby prolonging the adjustment process and exerting pressure on economic growth, states the IMF report. The real estate sector and its related industries in China have traditionally contributed significantly to the country’s GDP, representing approximately a quarter of it. The current decline in the property market follows Beijing’s 2020 crackdown on developers’ reliance on debt for expansion.
The IMF report underscores the remarkable growth of China’s real estate sector in recent decades, prompting authorities to emphasize that houses are primarily for living, not for speculative investment. The correction in the property market, which began with government efforts to curtail leverage in 2020-21, is deemed necessary and should persist, according to the IMF.
Despite Chinese authorities’ measures to ease financing restrictions for developers and homebuyers since late 2022, the real estate sector continues to face a broader decline. Increased financing support from the central government for completing pre-sold but unfinished housing projects is seen as essential to restore market confidence.
The IMF highlights that Chinese authorities have adopted a proactive fiscal stance in 2023 and intend to maintain it in the coming year. They are also developing measures to address local government debt risks. The People’s Bank of China recently announced a significant cut in the reserve requirement ratio, signaling a move in the right direction.
However, the IMF suggests additional monetary policy easing and reforms to further stabilize the economy.China’s economy grew by 5.2% in 2023, falling short of the IMF’s December prediction of 5.4%. This discrepancy was attributed to weaker-than-expected consumption in the fourth quarter. The IMF anticipates China’s growth will decelerate to 4.6% in the current year.
The IMF’s analysis reveals that relocating supply chain production, either domestically or to allied countries, could potentially reduce China’s GDP growth by about 6%, affecting global growth by 1.8%. Looking ahead, the IMF predicts a slight increase in inflation to 1.3% this year. Falling energy and food prices were the main factors affecting prices in 2023. Interestingly, while housing has driven inflation in other countries, the real estate slump in China has had a deflationary impact on prices.