Liu Baoxiang, who operates a mahjong parlor in a city on China’s rust belt, no longer indulges in ostentatious fashion purchases after watching the value of his two apartments drop by almost a third over the previous two years.

“I was previously considered wealthy in the area,” said Liu, who also owns some commercial property in the northeastern city of Liaoyuan.

“I used to buy mink coats in the tens of thousands of yuan, but I’ve hardly purchased any and haven’t travelled lately.”

While some areas of China’s property market, which accounts for about a quarter of the country’s economic activity, are beginning to show cautious indications of stabilization, the impact of the sector’s dramatic decline since 2021 is still felt widely and has complicated the country’s economic recovery.

The wealth effect is the term used by economists to describe the tendency of asset owners to reduce spending in an effort to recover their financial standing.

This issue is currently affecting the post-pandemic recovery of household consumption in China, where almost 70% of household wealth is in real estate. Chinese officials have sworn to make household consumption a more significant engine of economic growth.

According to Capital Economics, net household wealth decreased 4.3% overall in 2017 as a result of declining stock and housing values, marking the first dip since at least 2001.

“Households appear to have cut back their consumption in response to negative wealth effects,” said Julian Evans-Pritchard, head of China economics at the research firm.

“Recent homebuyers with large mortgages will have suffered the most and therefore likely cut back the most.”

Smaller city residents are suffering more than those who reside in major cities like Shanghai or Beijing, where property prices have remained more steady.

The statistics bureau’s 70 cities were divided into 35 smaller cities, or “tier 3,” where the average price of a new home fell for the 13th consecutive month.

Although the government withholds the precise prices, real estate agents claim that they are 20–30% below peak levels in some of those cities and even higher in smaller ones that are not included in the official survey, such Liaoyuan.

According to independent statistics from the statistics office, the national average price per square meter for new residences sold in January and February of this year was 10,558 yuan ($1,543), 6.0% less than it peaked in January and February of 2021.

A resident of Langfang, a city in the north, claimed that the price of her apartment had dropped to 8,000 yuan per square meter from the 18,000 yuan she paid for it three years ago.

“I have paid hundreds of thousands of yuan for a downpayment, paid off over 1 million yuan in loans and currently have over 1 million yuan in loans to repay,” said Emily, who only gave her first name for privacy reasons.

“I’m not going to spend money on anything this year. I need to tighten the belt. The suffering is unbearable.”

Undoubtedly, household consumption has increased since China lifted its harsh COVID restrictions in December, with domestic travel, the movie industry, and the food service sector leading the charge. On the other hand, year over year growth in car sales was unchanged in March.

While remaining below the range established over the previous two decades, consumer confidence is rising from record lows hit last year.

When compared to last year’s smaller base, which was impacted by COVID limits and lockdowns, retail sales were up 3.5% year over year in January and February and are anticipated to pick up speed in the coming months. On Tuesday, March data will be made public.

However, some economists had anticipated a much quicker rebound in consumer spending, as seen in the West after COVID-19 limitations were eased, pointing to a growth in household bank balances of 17.8 trillion yuan ($2.60 trillion) last year.

Most of the anticipated pent-up demand from the pandemic has likely not yet been released, according to data so far, which also include modest inflation rates.

In fact, deposits increased by 9.9 trillion yuan more in the first three months of this year. Savings are being used by many Chinese to pay off their mortgages early.

According to the most recent central bank survey, although the percentage of respondents who said they preferred to save decreased from the previous quarter by 3.8 percentage points in the first three months of the year, it was still reasonably high at 58%.

According to Nie Wen, an economist at Hwabao Trust, record savings are unlikely to be translated into large expenditure until the end of this year or 2024 because of the continued high level of uncertainty surrounding China’s development prospects in the context of a weakening global economy.

“Middle-class residents, accounting for 50% of consumption, remain cautious,” Nie said.

Creator of social media content If Jane’s 1.5 million yuan downtown condominium in the southwest city of Chongqing hadn’t lost 14% of its value, she would have felt more like a member of the middle class.

“We don’t buy new clothes anymore and we don’t go out,” she said, referring to her and husband. “It feels like we’ve bought a prison for ourselves.”

(Adapted from TheStraitsTimes.com)

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