Chinese Real Estate Market in Crisis

On Friday, Beijing announced a new set of measures aiming to rescue the declining Chinese real estate market. Prices of new homes have fallen for eight months, with the sharpest drop of 0.6% in April. These measures aim to stabilize real estate corporations by selling excess inventory. They aim to persuade families to buy homes by cutting mortgage rates and lowering down payments from 20% for a first home and 30% for a second to 15% and 25%, respectively. Additionally, the central government announced a 300 billion yuan (41.5 billion USD) facility for facilitating state owned companies to purchase unsold buildings for “reasonable prices”, according to officials, saying that these buildings would be converted into affordable housing, but statements lacked a specific timeframe for this conversion. 

This crisis has loomed as debt has accumulated in the real estate sector for three decades because Chinese real estate has been seen as a sure investment that would continue to grow, with debt against it considered safe. Over time, local governments took out loans against future land sales or land itself, using the money to fund infrastructure projects to keep the economy growing. Property developers also took out loans against the land they bought from the government, using the money to fund the construction of new buildings. This system appears stable as long as property values increase, but as soon as they fall, the system starts to collapse. As the Chinese population has slowed in growth and even begun to fall, property demand decreased and property value along with it, creating immense problems in the debt-ridden market.

The real estate crisis itself is largely attributed to the default of a Chinese property development company called the Evergrande Group in 2021 that sparked unease within the property sector. As many Chinese property developers had taken on large amounts of debt for years already, this sudden fall was considered a consequence of a set of regulations in 2020 known as the “Three Red Lines”, that real estate developers had to maintain: a debt-to-asset ratio of 70%, a debt-to-equity ratio of 100% or less, and enough cash on hand to pay short-term debts and commitments. The pressure to meet these regulations, along with the fall in demand, is considered the catalyst for Evergrande’s default. This default was followed by other developers, most notably a company called Country Garden, which was almost four times the size of Evergrande and officially defaulted on its debt in October 2023. The default of the companies mean that the projects they were working on have halted and home buyers in China, where homes are often bought before they are constructed, are left paying mortgages for homes that are not being built, and may never will. This consequence of the developer’s failure has created an immense distrust of the housing market, further compounding the sector’s problems with demand. This collapse has spread throughout the Chinese economy, leading to bank protests from people trying to stop paying their mortgages and making the whole system more and more unstable. 

Overall, these reforms aim to support the developers themselves and are trying to prevent further issues, but do not address the consequences that have already been realized. Following the announcement, Chinese real estate stocks rose by 9%, but these lingering economic concerns have made foreign investors weary of the Chinese economy, shunting the country’s meteoric growth since the time of Mao Zedong.

Photo Credit: The Beijinger