China’s housing accident is increasingly exacerbating regional economic disruption
In a residential development half-built from Apple’s largest iPhone factory in central China’s Zhengzhou city, Wang Lina has made an unusual offer to attract business after a 10 percent drop in price over the past 12 months.
Instead of requesting a standard 30 percent down payment, the sales manager has requested a 5 percent deposit and makes up the difference by offering a two-year interest-free loan financed by the project developer.
“We once hoped that the expansion of Foxconn would bring in migrant workers and boost home sales,” he said, referring to the world’s largest contract manufacturer that built a production base in the city ten years ago. “But it didn’t work that way and we have to do everything we can to get both measures.”
Wang is just one of the local developers working on smoothing house prices and slowing sales. Dozens of inland cities have a similar problem.
In coastal areas of China, however, speculation-driven housing booms have prompted developers to raise prices and select buyers through a lottery.
The contrasting experiences of the country’s prosperous coastal cities and inland fighting areas are a growing regional divide in China that threatens to weaken the recovery from the second largest economy in the world after the coronavirus.
“Zhengzhou has historically been faced with an oversupply of apartments and the pandemic is exacerbating the problem,” said Larry Hu, an economist at the Hong Kong Macquarie Group. “The situation is going to get worse in the next 12 to 24 months.”
Housing sales across developed Chinese markets, led by Shanghai and Shenzhen, after Beijing controlled the virus, kept the picture weak in Zhengzhou.
According to official data, city housing transactions, measured by area, have fallen by almost half in the first two months of this year compared to the same period in 2019. That’s compared to a 76 percent jump among the 10 same coastal cities. time.
Warm demand has raised the level of dangerous supply. According to the CRIC Shanghai-based consultancy, it will take 15 months – a high level of industry standards – for developers to sell inventory in Zhengzhou if no new project enters the market.
“Our top priority is to make sure that the existing projects are cleaned up rather than putting new ones on the market,” said a director of Changjian Holding, who has been trying to sell a set of homes in a suburb for more than two years in Zhengzhou.
After several years of overlapping property, demand declined along with government repression against real estate speculation.
Construction of Zhengzhou’s housing began in 2016, with efforts to reduce a property bubble in coastal cities, led by purchase restrictions, when investors were forced to flood the main business center where new homes could be sold without these restrictions.
The bond, however, ended a year later as Zhengzhou took measures, including restrictions on home buyers and sellers, to keep house prices under control. New home sales in the city fell by more than a third in 2017, after a 62 percent increase in 2016.
“Zhengzhou’s days ended as a paradise to turn the house upside down when they stopped buying and selling a home for up to three years,” said Wang Yan, an investor who made more than Rmb1m to negotiate apartments in the city in 2016.
Despite the roller coaster sales, the wave of buildings continued. Zhengzhou’s new homes started between 2016 and 2019 more than in the previous decade, according to official statistics. The developers said they were committed to the capital of Henan province – where more than 100 million people live – believing that migrants from nearby cities will continue to move.
“Other cities in Henan could not compete with Zhengzhou in terms of job opportunities, as well as in terms of education and medical resources,” said a local developer in Youwell. “It’s enough to boost the real estate market.”
Although Zhengzhou attracted migrants, most took low-paying manufacturing and service jobs that did not support local home purchases.
In the economy zone of the city’s airport, where Foxconn’s extensive factory complex is located, a standard one-bedroom apartment requires a monthly mortgage payment of more than Rmb4,500 ($ 690). The average Foxconn employee earns less than 5,000 Rmb per month.
“The current salary does not allow me to pay for an apartment in Zhengzhou in the coming years,” said Li Chaoyong, a Zhengzhou Foxcon employee who earns Rmb4,800 a month.
There is no quick fix to the problem. Zhengzhou’s economy is based on labor-intensive manufacturing known for its low wages. The city, located in one of the nation’s rural provinces, has not made much progress in growing high value-added industries such as finance or internet services.
With little hope of a quick rebound, the ambitious developers of yesteryear have begun to shrink in Zhengzhou. Sales of residential land in the city, the main indicator of housing investment, fell by more than a third in the first two months of this year, as many developers chose to suspend the building.
“The worst days are not over,” said a director of the China Merchants Property Zhengzhou branch.