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"In the future, with the flow of population and 10 million college students graduating each year and entering the job market, we will still have demand for real estate in many places." At the 2024 Boao Real Estate Forum, Lu Ting, chief China economist at Nomura Securities, pointed out that there is no absolute oversupply in China's real estate industry.

The 2024 Boao Real Estate Forum was held at the Westin Blue Bay Resort Hotel in Sanya, Hainan from August 13 to 16. At the forum, Lu Ting delivered a keynote speech entitled "Inseparable Real Estate and Economy".

“China’s real estate and economy are inseparable”

At the forum, Lu Ting said that he is a macroeconomic researcher who has been in the industry for nearly 19 years and has spent the most time in the real estate sector during his career.

Lu Ting pointed out that before the current contraction of the real estate industry, about a quarter of China's GDP came from real estate and its upstream and downstream industries. The overall income from China's real estate accounts for about 38% of government revenue, while real estate accounts for about 65% to 70% of Chinese household wealth.

"Over the past three years, local governments' income from land has dropped sharply, which has had a huge impact. Land fiscal revenue has fallen rapidly, reducing local residents' demand for housing." Lu Ting believes that there are other reasons for the current low growth rate of consumption, but the main reason is that China's housing prices have fallen by an average of about 30% in the past few years, which has affected the economy and consumption.

Lu Ting pointed out that many local governments, facing a sharp decline in fiscal revenue from land, have invested their financial resources in emerging industries such as new energy vehicles, batteries, and photovoltaics. "These industries are of course good, but when many local governments across the country invested in this industry, the prices of power batteries and photovoltaic components had fallen by 70% to 80%. The sales of many companies have increased, but their income has decreased, and their profits are negative. Many local governments have also borne a lot of pressure."

Lu Ting said that in the past few years, some local governments have made large-scale investments in infrastructure due to the rapid increase in income from real estate. A lot of debts have been borrowed, and now they are facing the problem of high local government debts and excessive fiscal burdens. Since the second half of last year, the central government has to clean up some local debts. If these problems are not dealt with, the Chinese economy will face greater costs in the future. At the same time, local fiscal difficulties have also led to another negative cycle. "The increase in many non-tax revenues in the first half of this year has had a negative impact on business operations, which is also caused by the decline in real estate."

“There is no absolute oversupply of real estate in China."

Lu Ting said that many people think that China's real estate industry is absolutely oversupplied. "In fact, I think there is a certain misunderstanding in this regard. Real estate is very important, but it is not absolutely oversupplied. China's urbanization is far from complete." "We may have too many houses built in places where the population will flow out in the future, while in large cities and central cities where the population is flowing in, the problem faced in the past decade is not that too many houses are built, but that the housing prices are too high."

Lu Ting believes that before this round of housing price decline, the housing prices in China's first-tier cities and some second-tier cities were among the highest in the world. This also means that in the process of real estate and urbanization development, houses should be built in places where population flows in and where the economy develops, so as to correct the market problems that have existed in the past decade.

Lu Ting said that the combination of clearance and reform is a critical policy, among which guaranteed delivery of houses is particularly important.

"Before this round of real estate cycle, new houses were the main products, which were pre-sold, which is equivalent to the futures market. The futures market is looking forward to future delivery. If there is no delivery mechanism and no supervision to maintain the order of the market, we certainly cannot expect the market to be cleared and resume normal operation." Lu Ting believes that dealing with guaranteed delivery of houses is not only a question of how the government and developers have fulfilled their responsibilities over the past period of time, but also about rebuilding the market's confidence in developers and confidence in supervision. At the same time, the process of guaranteed delivery of houses can also drive demand and bring about a certain degree of repair to the entire Chinese credit chain.

"There is no absolute oversupply in China's real estate industry. In the future, with the flow of population and the 10 million college graduates entering the job market every year, we will still have demand for real estate in many places." Lu Ting suggested, "Let China's land allocation, transfer payments, population inflow, and household registration increase be linked together." Follow the supply and demand of the market, follow the flow of population, and follow the layout of employment. On the one hand, the market will be cleared, and on the other hand, new supply and demand will be seen.

Written by: Southern Metropolis Daily reporter Qiu Yongfen from Boao, Hainan