A two-decade boom in real estate made many Chinese families feel richer. Now that the market has turned, many are curbing spending as their wealth declines, worsening the country’s economic slowdown.
In dozens of cities, average prices for new and secondhand homes have fallen since September, with no sign of a recovery on the horizon. Numerous property developers have defaulted and stopped construction, sending sales lower and triggering a wider loss of confidence in the market.
Now, many Chinese property owners are curbing spending and saving more as they worry about the possibility of further falls in home values ahead.
Shanghai resident Charlotte Tang said she had been planning on selling her apartment and investing more money in a larger one in a better neighborhood. But she quickly abandoned the idea after going through a two-month Covid lockdown in Shanghai this spring and witnessing the turmoil in the property market, which made her far less confident about the economic situation.
More price conscious now, she prefers taking shared rides instead of hailing private cars to cut down on everyday expenditures. She also worries the property market could get worse.
“If more people suffer from income loss, the foundation that supports the bubble in the property market will be shaken,” said 39-year old Ms. Tang, who works in the finance industry.
A weaker housing market isn’t the only reason people are feeling less confident about the outlook in China. They are also grappling with slowing income gains and rising inflation, while overall economic growth has slowed to its weakest level in two years. About a fifth of young people aged between 16 and 24 don’t have a job.
But falling home values have added to the belief in many households that now is a time to batten down the hatches and spend less. The concerns may be worsened by the fact that Chinese families tend to have a larger portion of their wealth—about 70%—in housing than people do in the U.S., where homeownership rates are lower and stock ownership is more common.
After contracting for several months in a row this spring, retail sales grew just 2.7% on-year in China in July and 3.1% in June—a pace of growth that is far below prepandemic levels. From 2000 until the end of 2019, when Chinese property values were mostly rising, retail sales growth averaged about 12% a month.
Sales of home appliances including TV sets, refrigerators and air conditioners fell 11% in the first half of this year from a year earlier.
Meanwhile, Chinese citizens are saving more. In the first half of this year, they socked away a record 10.33 trillion yuan ($1.53 trillion) in bank deposits, up from 7.45 trillion yuan in the same period last year.
A monthly gauge of consumer confidence plunged to a record low in May since China’s statistics bureau began compiling the data in 1991.
As fears of declining home values deepen, more people will re-evaluate their spending and investment decisions, said Ning Zhu, a professor of finance at the Shanghai Advanced Institute of Finance and author of “China’s Guaranteed Bubble.”
“The biggest question now isn’t whether the bubble will burst, but how to pull off a soft landing [in the property market] and minimize damage to the broader economy,” said Mr. Zhu.
“Once people’s expectations change, all bets are off,” he said. “It’s a profound and worrisome change.”
For some people, the problem isn’t so much a loss of confidence in home values, but an inability to cash out from properties they bought when the market was stronger.
In Kaili, a town of 700,000 people in Guizhou province in southwestern China, a resident said he had been planning on selling several apartments he owns to raise money to a buy home for his son in Beijing ahead of his son’s marriage. But local home prices have fallen as much as a fifth since the start of the pandemic, according to his estimates, and he wasn’t able to sell his apartments.
He said he eventually had to use all his savings and borrow from relatives to cobble together a down payment for the Beijing property. He said he has had to cut back on daily expenses as a result.
“Everyone thought [buying] homes in China is a sure bet. I never expected things to change so quickly,” he said.
Some economists and scholars have debated how big a role home prices play when it comes to spending patterns. In the U.S., consumers often spend more when their asset values increase—a phenomenon known as the wealth effect—and cut back when prices fall.
In China, a paper published by researchers from Southwestern University of Finance and Economics in Chengdu in 2019 found a 10% gain in housing wealth raised the country’s overall consumption by about 3%.
But some economists have noted that Chinese consumers sometimes behave differently than Americans. Researchers at Goldman Sachs argued in 2018 that rising home prices hurt consumption since 2008, because people had to save so much to make down payments, forcing them to rein in spending elsewhere.
That suggests a drop in home prices now could unlock spending for some families, as it becomes easier for them to afford homes.
Other economists are less sanguine. Nicholas Borst, director of China Research at Seafarer Capital Partners, wrote in a research note earlier this year that he expects households to tighten their purse strings in the wake of a severe real estate correction. The impact on Chinese households could be greater than in the U.S. because of their higher exposure to the housing market, he wrote, though the effect on the overall economy could be somewhat lower, given the smaller role consumption plays in powering China’s economy.
For families struggling with a weakened housing market, what matters is the real-world effect on their financial plans.
Cui Haibo said he is worried about his mother’s retirement due to the housing downturn in Bengbu, a small city in northern Anhui province. Mr. Cui, 49, said he bought a 600-square-foot flat for his mother in 2009 with the intent of selling it someday if he needed more money for her living expenses.
But while he has made a profit on the apartment over the years, its value has fallen considerably from a peak of around 300,000 yuan ($44,407) at the start of the pandemic. Even 200,000 yuan would be a “tough sell” now, he said, with so many people losing interest in buying property.
He now plans on saving more to fund his mother’s retirement as a result.
“In China, it’s always the average people who ultimately bear the pains of downturns,” he said.
This story has been published from a wire agency feed without modifications to the text