China Struggles to Convince People that Home Prices are on the Rise

China is facing a challenging economic situation that is deeply impacting business and consumer sentiment. The question of whether home prices will continue to drop or start to rise is a key factor influencing economic activity in the country. Analysts like Richard Koo are warning that China may be heading towards a “balance sheet recession,” similar to what Japan experienced during its economic slump.

Convincing people that home prices are at their lowest point and will soon begin to increase is crucial for stimulating economic growth. However, the reality is that it’s not clear whether prices have actually hit rock bottom yet. This uncertainty creates a significant hurdle in persuading individuals to borrow money and invest in the property market.

The property market plays a substantial role in China’s economy, accounting for at least 20% of its GDP according to some estimates. The recent slump in the property market was triggered by Beijing’s crackdown on developers’ heavy reliance on debt, coupled with the shock of the Covid-19 pandemic. Moreover, as China’s population starts to decline, the narrative of encouraging people to buy houses becomes even more challenging.

Chinese authorities have been cautious about implementing large-scale stimulus measures, largely due to the mixed results of previous programs. In the aftermath of the global financial crisis, China launched a significant stimulus package that initially faced skepticism. Despite a 70% drop in Chinese stock prices, the stimulus eventually led to rapid economic growth of 12%. However, sustaining the stimulus package beyond the point of achieving high growth resulted in overheating, speculation, and corruption.

Looking ahead, Richard Koo suggests that China needs to carefully navigate its economic policies to avoid a balance sheet recession. While stimulating the economy is necessary to overcome the current challenges, it is equally important to withdraw the support once growth reaches a sustainable level. This delicate balance requires strategic decision-making and a cautious approach to prevent future economic setbacks.

China’s struggle to convince people that home prices are on the verge of a turnaround reflects the broader economic uncertainties facing the country. As policymakers grapple with the need for stimulus measures and the risks of overheating, finding the right path forward will be critical to ensuring long-term economic stability and growth.