Chinese Real Estate in Crisis
By Melvin Najarian Dec. 11, 2024
After nearly two decades of price appreciation and rapid growth, the Chinese housing market crashed in 2021. This was indicated through a drop of house prices by 30% since 2021 according to E-House China Real Estate Research Institute. Notably, on Jan. 29, the crisis escalated as China’s largest real estate developers, the Evergrande Group, was liquidated after filing for bankruptcy. The company was $300 billion in debt and the Hong Kong court that ordered the liquidation cited the company’s failure to implement a debt restructuring strategy.
The deteriorating housing industry has had a major effect on the Chinese middle class, crushing the long-held belief that real estate was a guaranteed way to accumulate wealth. With property accounting for 70% of family investments, the housing industry crisis has resulted in a decline in family wealth, and many families have begun to postpone important life decisions and pause mortgage payments.
Prior to the housing industry’s decline, China’s economy had experienced a real estate boom, with the government encouraging real estate companies to build large-scale developments. Due to the appreciation of the housing market, property developers overbuilt in many regions, and many houses were bought as investments and remained unused.
“The issue of overbuilding property has caused a rise in ghost towns, as real estate developers took advantage of low interest loans to build residential complexes in hopes of drawing investment, but not necessarily actual tenants. Most buyers of the newly constructed property ended up being wealthy investors betting on price appreciation when future tenants moved in. However, a decrease in the rate of urbanization, slowing birth rates, and increasing concerns of affordability have discouraged many Chinese citizens from purchasing new property,” Senior Vincent Chung said.
Local governments have also faced economic trouble due to the decline of the housing industry. The housing crisis has led to a decreased property development rate, and according to the Official Monetary and Financial Institutions Forum, the decline in land and property sales has caused the local government spending to decrease by 18%.
In an earlier 2020 attempt to control property development, The People’s Bank of China introduced the Three Red Lines policy, which aimed to ensure that housing developers borrowed less money and had enough capital to pay their debts to continue their projects. The three red lines in question were that liabilities could not exceed 70% of assets, that net debt could not exceed 100% equity and that money reserves must be at at least 100% of short term debts, Evergrande had been in violation of all of the financial guidelines of the policy, contributing to the decision to liquidate the company.
Evergrande had also offered “wealth management products,” a risky financial product, to investors, raising $14 billion in the process. These promised investors rates of interest as high as 12%, and came with promises of complimentary Gucci bags, but ultimately became worthless as the company missed payments to contractors and creditors, per Reuters, resulting in protests outside Evergrande’s offices in late 2021 to early 2022.
“China’s housing crisis could have severe global implications, as undermining China’s role in the global economy could disrupt supply chains and limit trade with other countries who depend on China as a viable market. As the world’s second-largest economy, a housing crisis would hurt the country’s GDP and countries who depend on China for exports and manufacturing. Additionally, China’s housing collapse would reduce foreign investor confidence, making it so that less investors would stimulate the Chinese market” Junior Simone Vinay said.
Ultimately, to combat the housing crisis, China’s vice premier, along with top economic officials of the Communist Party, has proposed that local governments should purchase homes that have not been sold and turn them into social housing. To support the vice premier’s decisions, People’s Bank of China also declared that it will create countrywide programs that will provide $41 billion to local governments to aid them in buying unsold houses. In coordination with the proposed plans, the central bank’s deputy governor announced in a press conference that it would advocate for commercial banks to help local institutions purchase unsold houses and turn them into affordable social housing. The country has previously tried over 300 measures to resolve the crisis, per Caixin, a Chinese economic news agency, to little avail, as prices have continued to fall.
About the Contributors
Melvin Najarian
Staff Writer
I like to play tennis, listen to music, and hang out with my friends. My favorite band in Keane.
Yunseo Kim
Artist
Yunseo Kim is an artist. She enjoys tying out new art this is her second year in Journalism. Outside of school, she likes to do Taekwondo, and experiment with cooking.
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