Evergrande is 'just the beginning': Professor says more firms must exit China's property sector

A top expert on China's housing market said that China's realty sector must be "substantially smaller." This is necessary to maintain a stable and healthy economy. The sector is at too high risk. We built too many housing so stabilization must first come from trimming the sector," Li Gan (an economics professor at Texas A&M University) told CNBC's "Street Signs Asia". Gan estimates that 20% of China's housing stock remains vacant, as investors buy second- and third-party properties. He said that developers still continue to build thousands of new units every year. After years of borrowing excessively, Chinese property developers have seen rapid growth. The sector is facing serious problems as Evergrande and others have missed their bond repayments, and are now at risk of default.
China cannot use the real estate sector to boost GDP growth. This is not sustainable. Texas A&M University, Li Gan Economics Professor

China's authorities have intensified efforts to curb property speculation and rein in excesses. These measures include tightening mortgage lending rules and limiting developers' excessive borrowing. Gan is the director of the Survey and Research Center for China Household Finance, Southwestern University of Finance and Economics, Chengdu. He said that there are signs of a cooling in China's housing demand.

"Some of these real estate companies will need to exit the sector in order to ensure the health of the country and the sector," Gan said. Gan stated that Evergrande's problems are only the beginning. Many companies will have to leave the sector due to the lack of demand. Evergrande is responsible for approximately $300 billion of its liabilities. Global investors were worried about Evergrande's ability repay its debts. They also worried about potential spillovers into China's real-estate industry and economy. CNBC's Li Daokui, an ex-advisor to the People's Bank of China said last month that Evergrande would likely be "dissolved."

New home prices at an all-time low

According to Reuters calculations, China's new home price stagnated for the first time since February 2020. Reuters reported that the September average new home price in China's 70 largest cities was unchanged from the previous month. According to Reuters, August saw 0.2% more new home prices than the previous month.