Regular readers will be familiar with the on-going real estate bubble and my concern that real estate developers are running into trouble as they bought land at high prices in the boom time and find themselves having difficulties selling the finished apartments.
Rating agencies have warned on Chinese property before, so it is not surprising that Standard & Poor’s has repeated that warning, targeting Chinese developers. From Businessweek:
Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said.
A 30 percent decline in sales may leave many developers facing a liquidity squeeze, S&P said after conducting stress tests of the nation’s real estate companies. Most developers would be able to “absorb” a 10 percent sales drop next year, the credit rating company said.
“The worst isn’t over for China’s real estate developers,” S&P analysts led by Frank Lu wrote in a report today. “Developers are bracing themselves for slower sales and lower property prices ahead.”
Meanwhile, the deflating of the bubble has probably started. Lower primary market prices than secondary prices have become more common in various cities as developer inventories increase, putting more pressure on prices. While household leverage looks relatively low in China, real estate developers will be the first to get hurt. In that event, as I have argued, developers will have to cut prices aggressively.
Certainly, the view here is that the worst isn’t over: things are just turning.