Economic dominoesChina’s real estate crisis, a threat to the world
Developers and buyers burdened with debt who now refuse to pay their monthly payments: real estate in China is going through a crisis that will become global.
China’s real estate is going through a crisis, which will affect the entire national and even global economy. State of play in a sector that has been suffering for months.
How big is real estate in China?
Very big. In a broad sense, real estate accounts for a quarter of China’s GDP. The housing reform (1998) in China, which created a real real estate market, led to a meteoric boom in the sector, sustained by social norms, the acquisition of property is often a requirement for marriage.
Banks financed this chaos with loans to developers and buyers. Even today, the loans represent almost 20% of outstanding loans in the Chinese banking system, according to a recent report by ANZ Bank.
In China, most developers sell homes through a pre-sale system, where properties are purchased before construction begins. Thus the country has 225 million square meters of housing to be completed, according to the financial information agency Bloomberg.
Where does the crisis come from?
The rise of developers is accompanied by an increase in house prices. This situation has long been a concern of the government because many of the Chinese are unable to buy property. The huge debt of the developers, which endangers the economy and the financial system of China, is also a major concern of the authorities.
To reduce debt in the sector, Beijing tightened the conditions for access to credit for developers in 2021, drying up sources of financing for groups already in debt. A wave of payment defaults followed, most notably that of Evergrande, the former Chinese real estate number one, which was saddled with a massive debt of some 300 billion dollars.
The uncertainty linked to Covid-19, which weighs on household income, also prevents individuals from buying a property, further exacerbating the crisis.
How do buyers react?
In September 2021, the decline of Evergrande caused protests by worried buyers outside the headquarters of the group in Shenzhen (southern China). In June of this year, a new form of protest emerged: the mortgage payment strike.
Faced with the delay in the work, the owners of the houses bought before the construction announced that they will stop all payments until the work resumes. In one month, this payment strike spread to more than 300 real estate projects in 50 cities in China.
Should the world be worried?
China is the second largest economy in the world. Given the country’s closeness to the rest of the world, any spillover from the real estate crisis to China’s financial system will have international ramifications, analysts say.
“If payment defaults increase, there may be large and serious economic and social consequences,” warned the rating agency Fitch Ratings. In May, the American Central Bank (Fed) estimated that the worsening housing crisis in China could have consequences for the country’s financial system. In such a scenario, the crisis will affect world trade, the Fed pointed out.
Analysts say a bailout for the sector is unlikely. Such a bailout would have the pernicious effect of “putting all the risks on the banking sector or the government,” said Ken Cheung, an analyst at Japanese bank Mizuho. At the risk of causing the opposite effect than that sought.
Property owners and developers, who see the state intervene, will be tempted to ignore their responsibilities and stop their payments, Mr. underlined. Cheung.
Local authorities, developers and owners on the other hand can negotiate, on a case-by-case basis, exemptions from interest or deferrals of monthly payments, recommends analyst Chen Shujin, of American investment bank Jefferies.