China's housing bust is happening at 'a historically rapid pace' only seen in the worst collapses of the last 3 decades

• The International Monetary Fund said China's housing bust represents a historic collapse. 
• Demographic changes and structural challenges could spark further declines in property values.
• The magnitude of the collapse is among the largest seen in three decades, the IMF said. 

China's property crisis represents a historic collapse. 

The world's second-largest economy is grappling with a medley of bearish headwinds including deflation, a flight of foreign investment, youth unemployment, huge debt, and an aging population.

Most pressing, however, is its real estate trouble, which the International Monetary Fund characterized as a historic bust matching levels only seen in the worst collapses of the last three decades. 

In a report published February 2, IMF researchers Henry Hoyle and Sonali Jain-Chandra said the property market will no longer be the powerhouse driver of growth for China's economy that it was in the past.

Years of overreliance on real estate as an engine of the economy has led to a buildup of risks, the researchers said. Now, Beijing must clean up distressed developers like Evergrande and Country Garden, support falling real estate prices, and figure out how to put the sector on a more sustainable path. 

"Home prices became significantly stretched relative to household incomes in the decade before the pandemic, in part because consumers preferred to invest their considerable savings in real estate given the scarcity of attractive alternative savings options," the IMF researchers said. 

But expectations for ongoing price increases for land and homes led to overextended developers that borrowed too much and overpromised, which has ultimately fueled a collapse in real estate activity. 

Housing starts have plunged by more than 60% compared to pre-pandemic levels, the IMF said, and weak confidence among homebuyers has led to a sharp drop-off in sales. The collapse has transpired at "a historically rapid pace only seen in the largest housing busts in cross-country experience in the last three decades," researchers said. 

Despite mounting and multifaceted pressures, though, home prices have decreased modestly, given that some cities have curbed price declines with various interventions. 

In the years ahead, structural challenges and shifting demographics will raise the pressure across China's property market.

Support for housing will remain tepid as a result, and IMF projections estimate that real estate investment could fall 30%-60% below its 2022 levels, hitting rates comparable to major downturns in other countries that have seen a similar weakening in housing starts.

"The need for additional new housing will diminish in coming years as the population declines and urbanization slows," the IMF said. "Large public subsidies in the previous decade helped millions of people move to newer housing from older buildings lacking modern amenities. Such demand will likely be more limited as depressed land sale revenues have tightened local government fiscal constraints and fewer residents live in older housing."