Nanning, China – May 17, 2023 – A commercial residential property is seen in Nanning, south China’s Guangxi Zhuang Autonomous Region, on May 17, 2023.

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Weakness in China’s real estate sector could be a drag on the economy for years to come and could even affect countries in the wider region, Wall Street banks have warned.

“We see persistent weaknesses in the real estate sector, particularly related to lower-tier cities and private developer financing, and believe there is no quick fix,” Goldman Sachs economists led by China economist Lisheng Wang said in a weekend note.

Economists at Goldman said the housing market is expected to see “L-shaped recovery” — defined as sharp declines followed by a slow rate of recovery.

“We only foresee an ‘L’ shaped recovery in the real estate sector in the coming years,” they said.

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Goldman Sachs economists also noted that the Chinese government is expected to introduce more housing stimulus packages to support the sector.

“We believe the policy priority is to manage a multi-year slowdown rather than suggest an upcycle,” the analysts said, adding that Goldman does not expect “a repeat of the slum renovation program of 2015-18.”

They referred to China’s Urban Redevelopment Project which aimed to renovate millions of dilapidated houses over time to encourage urbanization and improve livelihoods.

According to Reuters, the government invested about $144 billion in the first seven months of 2018 to compensate residents of homes that were demolished in an effort to boost home sales and prices in smaller cities struggling with unsold homes.

The difference between public and private

If problems in the real estate sector deepen and bring risk aversion in the financial system and affect consumer confidence, it will cause a deeper slowdown in China.

“I think the recovery will be slow, but I think there’s also a huge difference between state-owned developers who have done better in this current recovery versus private developers who are still struggling,” Hui told CNBC.Squawk Box Asia” on Tuesday.

In a. the real estate sector was also emphasized government work report published earlier this year, which called for support for first-time home buyers and “to help tackle the housing challenges of new urban dwellers and young people”.

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Hui said the government’s push to limit property prices to a certain level could miss out on a large portion of potential buyers.

“While the authorities have been relaxing some of their policies in the last 6 to 9 months, I think the intention to maintain affordability, i.e. not to let prices go up too much… that really takes away a lot of the potential buyer. basis from the equation,” he said.

We are in for another slowdown

Morgan Stanley warned in its semi-annual outlook report that further weakness in the real estate sector is likely to bring further headwinds to China’s growth.

“If problems in the real estate sector deepen and drive risk aversion in the financial system and affect consumer confidence, this will cause a deeper slowdown in China,” Morgan Stanley chief economist Chetan Ahya wrote.

If monetary easing measures fail to support the ailing property sector, it will also lead to fears of spillovers in the rest of the Asia-Pacific region, the firm’s economists said.

“The downside risk would be if China’s real estate sector does not stabilize even with the expected easing,” they said. “In this scenario, confidence and financial conditions in China will tighten, which will have direct implications for China’s growth, but will also spill over negatively into the region.”

– CNBC’s Evelyn Cheng contributed to this report.

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