China’s Real Estate Crisis: Unfinished Homes Threaten Market Stability

China’s real estate sector faces a monumental challenge as the scale of unfinished property projects looms. A recent Nomura report highlights a concerning landscape: approximately 20 million units of pre-sold yet unconstructed or delayed homes, an issue 20 times larger than the capacity of Country Garden, China’s leading private developer. As reported by Bloomberg News, this predicament surfaced amidst financial strains within the sector, with Country Garden experiencing a default on a U.S. dollar bond. The situation has escalated to a critical juncture where the completion of these homes is not just a market necessity but a looming social stability risk.

The sheer size of this crisis can be encapsulated by the estimate of Nomura’s Chief China Economist, Ting Lu, and his team: “We estimate that there are around 20 million units of unconstructed and delayed pre-sold homes.” This staggering figure underlines the gravity of the predicament that Chinese homebuyers and the real estate market face. The analysts further quantified the enormity of the issue, suggesting that about 3.2 trillion yuan ($440 billion) is required to complete these homes. 

The traditional practice of selling apartments before completion has backfired, with the delays causing buyers to hesitate to engage with new properties. The Nomura report also cautioned, “In our view, amid the collapsing property sector and widespread credit fallout among property developers, home buyers might get increasingly impatient while waiting for the delivery of their purchased new homes.”

This mounting impatience has the potential to transform into a broader social challenge. The analysts forecasted, “At some point next year, the home delivery issue could turn into a social issue and endanger social stability, and Beijing may eventually need to ramp up policy support significantly.” This is viewed as a crucial step towards rebuilding trust in the property sector and, by extension, the Chinese economy.

The backdrop of this crisis is set against a series of mortgage boycotts last year by homebuyers frustrated with construction delays. The financial pressure on developers has been intense following the government’s 2020 crackdown on excessive borrowing habits within the industry, compounded by the complications introduced by COVID-19 restrictions.

Furthermore, Nomura’s analysts provided a stark projection: “Assuming 20% volume growth in new home completions for the current year, developers will only manage to deliver 48% of the homes pre-sold between 2015 and 2020, leaving 52% still subject to delays.” This grim reality paints a picture of a sector desperately needing intervention and restructuring.

The unfolding scenario of China’s unfinished real estate projects is a warning siren for policymakers and stakeholders alike. Decisive action is paramount, with a massive financial injection needed to bridge the gap and the threat of social unrest looming. As the industry grapples with the consequences of over-leveraging and pandemic-induced challenges, the path to recovery appears contingent on substantial government support and strategic recalibration of the housing market’s operational framework.