“Houses are for living in, not for speculation,” Chinese President Xi Jinping has repeated many times over the past six years. He had said this when speaking at the 19th party congress in 2017. And now, as Xi looks to seek an unprecedented third term nomination a few months from the 20th Congress, he is witnessing his worst fears unfold — a huge crisis in the country’s real estate sector.
A 20-year real estate boom, fueled by presale proceeds and debt, has made Chinese real estate the largest single asset class in the world, worth more than a staggering $50 trillion.
In August 2020, China issued guidelines limiting how much developers can borrow in order to force them to deleverage. Dubbed the “three red lines,” the measures have denied credit to some developers and set in motion a spate of defaults.
Xi’s crackdown on skyrocketing home prices has meant the top nine property magnates have lost $79 billion in wealth since 2020. The erosion of their wealth is symbolic of the crisis that has gripped China’s real estate sector, an industry that accounts for about 70% of the country’s household wealth and accounts for up to 30% of its GDP.
The China Evergrande Group is the most indebted real estate developer in the world
China’s Evergrande Group, which racked up $305 billion in debt to become the world’s most indebted real estate developer, was the biggest casualty. Evergrande defaulted in December last year.
Over the past year and a half, Chinese developers, including top developers like Kaisa Group, Shimao Group and Sunac China, are facing at least $18 billion in offshore dollar bonds and $2.5 billion in onshore debt – Dollar defaulted.
China’s home prices and sales have fallen for a record 11 months as consumer confidence in the property market weakens. This has made it harder for developers to pay for construction, as pre-sales account for up to 90% of all property sales in China.
What has compounded the crisis is the refusal of tens of thousands of homebuyers to pay mortgages on unfinished construction projects.
According to Nomura, between 2013 and 2020, only about 60% of homes pre-sold by developers were actually delivered. In just two months, the boycotts have spread to at least 320 projects in 99 cities, making it perhaps the largest mortgage protest in China’s history.
Banks in China have around US$9 trillion exposure to the real estate sector, of which US$5.3 trillion is in the form of mortgage loans. Analysts estimate that as much as $291 billion in loans could be affected by the boycotts. Unlike the US subprime mortgage crisis of 2007, when money was lent to risky borrowers who later defaulted, many in China are able to pay but choose not to.
[Byte of Ananth Narayan, Associate Professor, SP Jain Institute of Management & Research]
China, meanwhile, has stepped in to help developers facing a liquidity crunch by offering $29 billion in special loans through political banks. On Wednesday, China announced a stimulus package that includes $44 billion that state-owned banks can invest in infrastructure projects.
However, research firm Capital Economics estimates developers need $444 billion to complete stalled projects.
The stimulus packages ease the burden on local governments, who are responsible for infrastructure spending.
As the housing crisis deepened, developer demand for land has collapsed. As a result, local government revenues from land sales, a key source of revenue, have plummeted 32% this year.
While a full collapse of China’s economy or banking system seems unlikely, a soft landing for the government’s burst housing bubble is unlikely.
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