S&P predicts one-third decline in China's real estate sales as situation worsens

China's massive housing market may experience a one-third decline in property sales this year as consumers lose faith in the industry and pressure mounts on struggling developers to finish pre-sold flats. The specialists at the rating agency S&P have decided that the decline in sales will be twice as bad as they had initially predicted for this year, amid rumours that the government is contemplating a rescue of the sector that might cost 300 billion yuan ($44 billion).

The growing situation has gained attention in the wake of last week's report that unsatisfied apartment purchasers at building developments in more than 100 locations had united to withhold payments on unfinished residences. The strike has increased the strain on developers, who are already struggling with severe cash flow issues and rely on buyers making upfront payments for homes off the plan to keep money moving through their operations. The loss of this income will be devastating because the revenues might be utilised to pay debts as well.

Some well-known developers have already declared bankruptcy, sending shockwaves through the global financial system. Most notably, Evergrande, the nation's second-largest real estate company, confessed last year that it was unable to pay a portion of its $300 billion debt mountain. Recent data on home sales suggested that the sharp price declines were levelling out, but that was before the announcement of the mortgage strike caused expectations to be revised. According to S&P, previously strong companies may fail as a result of the spread of decreasing sales and a decline in confidence.

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According to a separate agency analysis, the loans in question are believed to be worth about 1 trillion yuan ($144 billion), which poses a risk to financial stability in the event of a dramatic price decline, which is now looking inevitable given the drop in sales. Sales and prices are under pressure to decline as a result of the economy's slowdown and rising unemployment.

(with inputs from agencies)