China’s real estate sector needs to be “considerably smaller” to keep the overall economy healthy and stable, a leading expert on the Chinese housing market said.

“We have too big a risk in the area. We have built too many homes, so stabilization has to come first. [from] shrinking the sector, ”Li Gan, professor of economics at Texas A&M University, told CNBC’s“ Street Signs Asia ”on Wednesday.

Gan estimated that around 20% of China’s housing stock is vacant, with buyers racking up the second and third properties as investments. Even then, developers continue to build millions of new units every year, he said.

Chinese real estate developers have grown rapidly after years of excessive borrowing. Problems in the industry have come to the fore in recent months as Evergrande and other developers have missed bond repayments and are threatened with default.

Using the real estate sector to boost GDP growth is not … a sustainable path for China.

Li Gan

Professor of Economics, Texas A&M University

Chinese authorities have stepped up efforts to curb excesses in the real estate sector and curb speculation among homebuyers. Measures include limiting rampant borrowing among developers and tightening rules for mortgages.

There are signs that housing demand has cooled in China, said Gan, who is also director of the Survey and Research Center for China Household Finance at Southwestern University of Finance and Economics in the Chinese city of Chengdu.

“Some real estate companies, I would say, will have to exit the industry for the country and the industry to be healthy. So the Evergrande problem is just the beginning, many companies are expected to exit the industry because demand is not there. ‘is no longer there, ”Gan said.

Evergrande has approximately $ 300 billion in liabilities. Worries about the company’s ability to repay debt are scary global investors who feared a possible spillover into the rest of China’s real estate industry and economy.

Li Daokui, a former adviser to the People’s Bank of China, told CNBC last month that Evergrande would likely be “dissolved” into four main groups.

New housing prices stagnate

New home prices in China have stalled for the first time since February 2020, according to Reuters calculations of the latest official data.

Average new home prices in 70 major Chinese cities were unchanged in September from the previous month, Reuters reported. In August, new home prices rose 0.2% month-on-month, the news agency said.

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Gan said lower home prices would allow consumers to spend on other things, which would be healthier for the overall economy. He added that consumption is a major driver needed to take over from the Chinese economy.

Overall, the contribution of real estate and related industries to China’s gross domestic product could drop from around 30% currently to around 15%, Gan predicted.

He added that the Chinese government would be able to organize a gradual slowdown in the real estate sector to avoid a hard landing in the economy.

“Using the real estate sector to increase GDP growth is not (…) a sustainable path for China,” said the professor.

The slowdown in the real estate sector has affected China’s economic growth. The world’s second-largest economy on Monday reported disappointing growth of 4.9% of GDP in the third quarter compared to a year ago.

– CNBC’s Evelyn Cheng and Weizhen Tan contributed to this report.

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