China’s real estate crash exposes growing regional economic divide

In a half-built residential complex a few blocks from Apple’s largest iPhone factory in central China’s Zhengzhou city, Wang Lina made an unusual offer to attract business after a drop 10% price reduction in the last 12 months.

Instead of requiring a standard 30% down payment, the sales manager requested a 5% down payment and made up the difference by offering a two-year interest-free loan funded by the project developer.

“We once hoped that Foxconn’s expansion would attract migrant workers and boost home sales,” she said, referring to the world’s largest contract manufacturer who has built a production base in the city of 10 million inhabitants ten years ago. “But it didn’t work that way and we have to do what we can to make ends meet.”

Wang is just one of many local developers struggling with easing house prices and weak sales. Dozens of towns in the interior face a similar problem.

In China’s coastal poles, however, a speculative real estate boom prompted developers to raise prices and select buyers by lottery.

The contrasting experience of the country’s prosperous coastal cities and struggling inland centers offer a glimpse of China’s growing regional divide that threatens to undermine the post-coronavirus recovery of the world’s second-largest economy.

An advertisement for a development in Zhengzhou. The city’s real estate transactions, measured by area, fell by almost half in the first two months of this year compared to the same period in 2019, according to data © Nicolas Asfouri / AFP via Getty Images

“Zhengzhou has always faced an oversupply of apartments and the pandemic is making the problem worse,” said Larry Hu, economist at Macquarie Group in Hong Kong. “The situation will deteriorate in the next 12 to 24 months.”

While home sales increased in China’s developed markets, led by Shanghai and Shenzhen, following Beijing’s successful control of the virus, the picture remained weak in Zhengzhou.

Official data shows that the city’s housing transactions, measured by floor space, fell by almost half in the first two months of this year compared to the same period in 2019. That compared to a jump. 76% among the top 10 coastal cities over the same period. period.

Lukewarm demand pushed supply to a risky level. According to CRIC, a Shanghai-based consulting firm, it will take 15 months – a high level by industry standards – for developers to sell their inventory to Zhengzhou on the condition that no new projects enter the market.

“Our top priority is to make sure our existing projects are approved rather than bringing new ones to market,” said an executive from Changjian Holding, a developer who has spent more than two years trying to sell a complex. residential in a suburb of Zhengzhou.

The ownership overhang follows several years of an accelerated construction boom coupled with a government crackdown on real estate speculation that has dampened demand.

Zhengzhou’s housing construction took off in 2016, when efforts to curb the real estate bubble in coastal cities, led by purchase limits, prompted investors to flood the central business center where new homes could be located. sold without these restrictions.

The windfall, however, ended a year later after Zhengzhou unveiled measures, including restrictions on both buyers and sellers, to control house prices. The city’s new residential sales fell by more than a third in 2017 after rising 62% in 2016.

“Zhengzhou’s era as a home flipping paradise came to an end when they prevented one of them from selling a property for up to three years after the purchase,” said Wang Yan, a investor who had earned more than 1 million rmb. In the business of apartments in the city in 2016.

Despite the roller coaster sales, the construction frenzy continued. Zhengzhou’s new housing starts between 2016 and 2019 totaled more than the previous decade combined, according to official statistics. The developers said they were engaged in the capital of Henan Province – home to more than 100 million people – in the belief that migrants from neighboring cities will continue to settle.

“No other city in Henan could compete with Zhengzhou when it comes to employment opportunities as well as educational and medical resources,” said an executive from Youwell, a local developer. “This is enough to drive the real estate market up.”

Although Zhengzhou attracted migrants, most of them worked in low-paying manufacturing and service jobs that could not support local housing purchases.

In the city’s airport economic zone, home to the sprawling Foxconn industrial complex, a standard one-bedroom apartment requires a monthly mortgage payment of over Rmb4,500 ($ 690). The average worker at Foxconn earns less than 5,000 Rmb per month.

“My current salary will not allow me to pay for an apartment in Zhengzhou in the years to come,” said Li Chaoyong, a worker from Zhengzhou Foxconn who earns 4,800 Rmb per month.

There is no quick fix to the problem. Zhengzhou’s economy relies heavily on labor-intensive manufacturing known for its low wages. The city, located in one of the most rural provinces of the country, has made little progress in the growth of high value-added industries such as finance or internet services,

With little hope of a quick rebound, Zhengzhou’s once-ambitious developers are starting to cut back. The city’s residential land sales, a leading indicator of housing investment, have fallen by more than a third in the first two months of this year compared to a year ago, with many developers reporting chose to suspend construction.

“The worst days are not over,” said an executive from the Zhengzhou branch of China Merchants Property.

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