China’s property market crisis deepens despite developer rally

China’s real estate industry, a significant contributor to the country’s economy, has faced a series of challenges in recent years, leading to widespread turbulence. 

The sector has been grappling with the combined impact of Beijing’s stringent three red lines policy, aimed at curbing excessive leverage, and the disruptive effects of the Covid-19 pandemic. In 2022, home sales among the leading 100 developers reached only approximately 64 percent of the pre-pandemic levels witnessed in 2019. 

To make matters worse, the embattled property market in China is set to notably disrupt the growth of the world’s second-largest economy for the years to come, said Wall Street giant Goldman Sachs (NYSE: GS), citing a shift in policy priorities as per a South China Morning Post report on June 12.

“Based on our estimates, the property weakness will likely be a multi-year growth drag for China. We see persistent weaknesses in the property sector, mainly related to lower-tier cities and private developer financing, and believe there appears [to be] no quick fix for them. We only assume an ‘L-shaped’ recovery in the property sector in the coming years.”

– Goldman Sachs wrote in the report.

Impact on stocks

The remarks from Goldman discouraged investors who have watched stocks of mainland Chinese developers ink the best monthly performance since November.  

The bank said Chinese lawmakers are prioritizing curbing the slowdown in China’s real estate sector, rather than focusing on creating a new round of upcycle, such as the one fueled by national shantytown renovation plans from 2015 to 2018, said Goldman’s analysts led by Lisheng Wang. 

Instead, the policymakers are now focusing on endorsing strategically important industries due to slowing demand and lower housing affordability, Wang wrote in a note. 

Iron ore price down 5% on Goldman’s warnings

In the meantime, Goldman’s warnings triggered a 5% drop in iron ore prices, marking their first decline in nine sessions. 

At press time, Iron ore slightly recovered but was still down 2.9% at $109.25 in Singapore, after plunging to as low as $107.05. 

Before today’s decline, iron ore saw a price surge of 14% over the previous eight sessions after Chinese authorities introduced broader measures to spur recovery in the property market.