KKR Partner Says It’s Only Halftime for China’s Housing Market Crisis

China’s housing market correction may be just halfway complete, according to KKR partner Henry H McVey.

Rather than a typical correction in which housing reaches a floor as both price and volume collapse, the crisis in Asia’s biggest economy has centred on volume, McVey said in a KKR report revealing his impressions during a recent trip to China.

McVey, who leads global macro, balance sheet and risk at the Manhattan-based private equity giant, heard from one Chinese developer who said the crisis is complicated by the fact that housing liabilities extend across the private and public sectors as well as local and central government levels.

“Thus, there is no quick fix,” said McVey, who also serves as chief investment officer for KKR’s balance sheet.

Comparing Corrections

McVey observed that the sharp decline in developers’ confidence has triggered a tumble in China housing starts, which are down almost 60 percent from their peak.

By comparison, the US saw a 73 percent dive and Spain a 95 percent plunge during the first three to five years after their respective housing market bubbles burst. Japan’s housing-starts correction happened in a more gradual and persistent manner, according to the report, which drew on research by KKR’s chief economist for Greater China, Changchun Hua, and analyst Allen Liu.

China’s housing investment has fallen 25 percent from the peak versus 56 percent in the US and 68 percent in Spain over the same period, the report noted, while in Japan the decline happened persistently over the past three decades.

“This ‘slow burn’ speaks to the adverse impact of not moving quickly to write-off assets within the banking system as well as to the importance of a strong monetary response aimed at improving confidence,” McVey said.

Inventory Mismatch

Despite a significant decline in levels of activity, China’s housing prices have barely corrected in absolute terms because of statistical issues, regulatory restrictions and households’ reluctance to sell at a “low” price — a state of affairs likely to lead to further correction pressures down the road, the report said.

And while household formation in China is less than 8 million a year, the country at the end of 2023 had an estimated 3 million completed units and 22 million units of forward housing to be delivered, according to KKR.

“This sizeable mismatch, we believe, means that, unless there is more government intervention to upgrade quality and/or write off assets, it will take considerable time to digest the inventories,” McVey concluded.