In the latest data, China’s property sales in April fell at their fastest pace in 16 years, despite several rounds of policy easing.

New home sales last month tumbled 47% year-over-year, an exacerbation from March’s 26% decline, and the worst drop since 2006, according the National Bureau of Statistics. Prices in 70 key cities have now fallen for eight straight months.

“Conditions in China’s property sector continue deteriorating, with lockdowns and other Covid restrictions exacerbating the downturn,” says Logan H. Wright, partner and general director, China Markets Research, Rhodium Group. “The key problem remains the overall decline in sales and prices, which is creating an annualized shortfall in developers’ revenue of around 3%-4% of GDP compared with last year. Interest rate cuts may help at the margin, but only after the threat of lockdowns is lifted, and probably only in major cities as well.”

Meanwhile, the specter of mass defaults among developers still looms.

China Evergrande Group
,
once the country’s largest developer and now its most indebted, was declared in default last year and is currently restructuring and unloading assets to pay down its estimated $300 billion in arrears.

China’s third-largest developer, Sunac China Holdings, this month missed its deadline to repay $745 million in offshore bonds, and said publicly it was likely to default on additional debt payments. 

Trading of its Hong Kong-listed shares was halted last month, along with several other major developers, after they failed to disclose annual financial results. At the time of the trading freeze, Sunac’s share price had fallen almost 80% over the preceding year. Fitch Ratings last week downgraded Sunac bonds for a second time this year, putting them further into junk status.

Guangzhou R&F Properties

(2777.Hong Kong), a major developer with numerous large-scale global projects, has missed similar payments and said recently it was selling its stake in a London project at a $234 million loss.

Evergrande, Sunac, and R&F did not respond to requests for comment.

The defaults are unlikely to abate anytime soon. That is in part because many firms that issued more debt than they can repay have been undertaking maturity extensions and bond exchanges. In fact, these practices, which are often used to simply put off default dates, have increased this year in proportion to defaults themselves.

But they can only be postponed for so long. Around one-third of high-yield China property firms will default in 2022,

Goldman Sachs Group

said in a note on Friday. 

“We view bond exchanges and maturity extensions as efforts that provide short term relief on credit stresses by pushing bond maturities to a later date, but are not sufficient to resolve the credit issues,” according to the note.

Meanwhile, policy measures targeting the sector have sent mixed signals. 

On Saturday, China’s legislature approved an expansion of trial property-tax programs in Shanghai and Chongqing, with details soon to come, it said.

The move is billed by policy makers as a way to tamp down on speculation and make home-owning more affordable for the middle class. The mantra, “housing is for living in, not for speculation” is mentioned nearly every time a significant policy in the sector is announced. 

But broad property taxation could accomplish a much more crucial goal for Communist Party rule, by promoting social stability. 

This is because local governments are more dependent on home-sale fees than any other source of income, but have been losing this vital stream as sales decline. A real estate tax, especially among high-value properties, would partially mitigate this falling income trend.

On Friday, China surprised observers by making the largest cut on record of a key mortgage-related interest rate. The central bank slashed its five-year loan prime rate by 15 basis points to 4.45%. The five-year rate tends to be the benchmark banks use to price mortgages, while the one-year rate—which was left unchanged—is the metric for most other loans.

Despite the large cut, markets weren’t swayed, and analysts remained skeptical.

“The effectiveness of the mortgage lending rate cut is limited by lockdowns, with limited impact on consumer (mortgage) sentiment; reopening and buyer sentiment recovery are more key in our view,” Cheng Wee Tan, senior equity analyst at Morningstar, told Barron’s.

In a note on Monday, Goldman Sachs said, “Coupled with record high unemployment rates and the lowest expectation for future house prices since 2015, it is an uphill climb for the government to stabilize the property sector.” 

Any chance for a sharp housing recovery, like the one that took place after China’s 2020 Covid wave, looks unlikely, the authors said. “Despite the ongoing policy easing, challenges remain in the property market which may prolong the low-interest-rate environment.”