China’s Housing Bubble Has Burst: Here’s Why
Bloomberg
Homebuyers in at least 100 Chinese cities have threatened to stop their mortgage payments since late June as construction on many pre-sold properties has not resumed, according to Reuters.
Citizens have taken it to the streets in an attempt to get the government’s attention. The mortgage protest became a rare act of public disobedience in China which has gained more momentum as the crisis continues, shaking the foundations of the Chinese economy, Reuters reports.
According to Reuters, film and photography from the protests have been wiped from social media through censorship, keeping them from the public eye. Nevertheless, the protests have continued.
New projects dropped by 45 per cent in July 2022, property investments by 12 per cent, and the value of home sales by 29 per cent, compared to last year, The Economist reports.
The housing market is the most important sector in the Chinese economy, accounting for 23.6 per cent of China’s GDP, as estimated by an October 2021 Goldman Sachs paper. By some estimates, as reported by The Economist, 70 per cent of household wealth is currently in the sector.
In August 2020, the Chinese government introduced the “three red lines”, which are financial regulatory guidelines restricting developer’s ratios of net debt to equity, liabilities to assets of under 70 per cent and a cash to short-term debt of at least 1. As reported by The Economist, this crackdown on the real estate industry alongside the country’s zero-COVID policy are the two immediate causes that triggered the housing crisis.
The Guardian reports Evergrande as the former second biggest property developer in China. According to the Congressional Research Service for the United States Congress, approximately 60 per cent of the firm’s assets are un-built and unsold properties. Using previously-financed deals as collateral for new loans, this practice allowed the firm to accumulate debt and become substantially leveraged–with over $300 billion USD in liabilities by the end of 2020.
Developers need to sell homes long before they are built to generate enough liquidity to repay loans in order to continue this cycle. Last year Evergrande pre-sold 90 per cent of homes, as reported by The Economist. However, without access to bonds and loans, as banks cut their exposure to the property sector, and with a decline in sales, the debt-fueled real estate bubble was bound to burst.
According to The Economist, Ever- grande defaulted in December 2021 after months of scrambling to raise cash to repay creditors, suppliers and investors. The Chinese government has intervened to take a leading role in guiding the company through a restructuring of its debt. According to ANZ Bank China at least 18 other property firms have defaulted in 2022.