The once-mighty engine of China’s economic growth, its property market, is now experiencing a severe crisis. This crisis, marked by financial troubles and bankruptcies of major developers like Country Garden, has been brewing for years, stemming from a property bubble inflated by cheap debt. As the demand from buyers dwindles, the Chinese government is taking drastic measures to rescue the market. In this article, The Telegraph explores the causes of this crisis, its consequences on China’s economy and global markets, and the government’s radical plan to fix it.
The Making of a Bubble
For years, China’s property market was a key driver of its economic prosperity. During economic downturns, authorities often relied on property investments to boost the economy. Massive investments were made in the property sector, with both private and state-backed developers receiving substantial funds. The government initiated “shantytown redevelopment” projects from 2015 to 2018, offering cash incentives to residents whose homes were demolished for urban renewal.
Developers, buoyed by domestic and foreign investments, borrowed heavily to fuel their expansion. Some operated with minimal cash reserves, with many being entirely leveraged. Local authorities eagerly sold land to developers, using the revenue to fund infrastructure projects. Speculative buying became rampant, with investors assuming that house prices would perpetually rise.
Buyers often purchased homes off-plan, years before construction began, often paying in cash to secure substantial discounts. This practice further enriched developers.
Housebuilders Facing Collapse
Initially, this strategy seemed successful, contributing significantly to China’s status as one of the world’s largest economies. In 2016, the real estate sector accounted for 35.8% of China’s GDP. However, by 2020, the government grew concerned about developers operating with meager cash reserves. To curb excessive borrowing, new regulations were implemented to limit developer loans, acting as the immediate trigger for the property market crisis.
In 2021, banks went beyond government directives and cut off financing to highly leveraged developers. Later that year, Evergrande, one of China’s largest developers, collapsed, sending shockwaves through the market. Subsequently, other developers followed suit, with companies responsible for 40% of Chinese home sales defaulting since mid-2021.
Buyers who had paid for properties from developers like Evergrande found themselves in turmoil as their investments failed to materialize. Concerns about developer bankruptcies rippled through the market. Funding sources have been constrained, halting the previous revenue and profit growth of developers.
A Glut of Homes
The real estate crisis also resulted from an oversupply of homes, particularly in smaller cities, where properties were constructed despite a lack of demand. Urbanization slowed, and China’s population growth stagnated. People gravitated toward major cities like Shanghai, Chongqing, and Beijing, which offered better job prospects.
Shantytown redevelopments further exacerbated the oversupply issue. Country Garden, a developer that narrowly escaped collapse, built homes in cities where demand was relatively low, creating a “reality check” as investors struggled to find tenants for these units.
This situation serves as a cautionary tale for policymakers globally, highlighting the pitfalls of stimulating the economy through excessive property investment. Over-investment can lead to severe structural issues down the road, as China is currently experiencing.
Easing Restrictions for First & Second-Time Buyers
In a bid to reinvigorate demand, central and local governments have relaxed stringent property ownership restrictions. Since 2015, China had promoted the idea that “houses are for living in, not speculation.” However, this stance shifted in the summer of 2023. Chinese leaders removed the slogan from the nation’s policy doctrine and announced plans to make property ownership cheaper and more accessible. These measures include easing restrictions for second-home buyers.
Previously, second-time buyers faced high down payment requirements, sometimes as much as 80%. These requirements were designed to discourage speculative investment and ensure affordability for first-time buyers. However, the government has now equalized down payments for second-time buyers who do not own other properties, aligning them with first-time buyers. Down payment requirements for first-time buyers have also been lowered from a minimum of 30% to 20%, with some local authorities further reducing these requirements to boost demand.
Moreover, the central government is urging local authorities to simplify the process of obtaining local registration, allowing people to purchase property in more locations. In some cities, property acquisition was previously contingent on having a hukou, an official document certifying legal residence in a specific area. This policy aimed to control urbanization and limit the population in major cities.
Additionally, mortgage rates have been reduced to make borrowing more affordable, and property prices have started to fall. Developers now have more flexibility to lower prices as needed.
Will Government Interventions Work?
The effectiveness of these government interventions remains uncertain. Lowering down payment ratios has not produced the desired results in smaller cities, where the main challenge lies in economic uncertainty and diminishing expectations of rising property prices. As the population ages and family sizes shrink, demand for properties is expected to continue declining.
While some major cities have seen a slight rebound in sales, it’s too early to determine if these measures will fully revive the market. Many developers are teetering on the brink of bankruptcy, and further high-profile collapses could undermine any returning buyer confidence.
A property market recovery is not anticipated in the near future, and there’s a looming risk of a “contagion effect” in the next 12 months. The government may consider additional measures, but they must tread carefully to avoid creating a boom-and-bust cycle. Legacy property rules, linked to China’s former command-and-control economic system, may need to be adapted to the changing environment.
The Impact on Global Markets
The property market downturn in China carries significant implications for the country’s economy and global markets. The property market’s contribution to China’s GDP has decreased from 35.8% to 26.9% between 2016 and 2022, impacting employment and consumer confidence.
China’s property market has historically influenced global commodity markets, with the country consuming a substantial portion of the world’s steel and other resources. Any downturn in China’s property market can have a ripple effect, affecting industries worldwide.
In conclusion, China’s property market crisis has deep-rooted causes, and its consequences are reverberating through the nation’s economy and global markets. The government’s efforts to remedy the situation are complex and may take time to yield results. Policymakers worldwide can learn valuable lessons from this crisis, highlighting the importance of balanced economic strategies and the perils of excessive property investment.