China’s real estate market is stagnating and the country’s largest company, Evergrande, is sinking into debt and dragging several companies into crisis with it. An increasing number of loans are not being repaid, so houses under construction are not being completed and Chinese families are forced to live in half-finished homes.
Quick and easy loans vanished, although house prices decreased, real estate sales fell by 40% compared to the previous year.
The lack of liquidity caused several real estate projects to slow down, so thousands of homebuyers do not know when the houses they paid for will be finished and if there will be any kind of refund in case construction is permanently suspended.
As a result, several protests erupted in China, calling for homebuyers to cease mortgage payments until housing construction resumed.
The initial blow was the collapse of Evergrande, which was unable to pay a $300 billion debt. This pushed other companies to suspend payments as well. Another of China’s real estate companies, Shimao Group, surprised a shareholders’ meeting at the beginning of this year with the announcement that it could not pay its $10.1 debt.
In China, most home purchases are made with upfront payments. Often homebuyers are completely ignorant of the future viability of the project they invested in.
Nearly two-thirds of the wealth in China is represented by the real estate market and project financing is obtained through down payments. So if they are not attracting new buyers then there is no more money to complete those projects, let alone start new ones.
Last month’s data reported by China’s National Bureau of Statistics shows real estate investment declined 6.5 percent, new real estate projects fell more than 40 percent from a year earlier, and mortgage lending declined 36.8 percent in July. The slump in the real estate market, which accounts for 29 percent of the country’s GDP, reflects the Chinese economy’s difficulties in achieving the annual growth target of 5.5 percent.
The “zero-COVID” policy imposed by the Chinese Communist Party along with regional lockdowns in the face of COVID-19 outbreaks are denting consumer confidence, in addition to rising food inflation that is fast becoming an everyday problem in the country.
The CCP took measures to counteract the real estate crisis, such as reducing initial deposits, offering tax rebates, and subsidies for homebuyers. In addition, it provided a new line of loans to help builders and thus prevent construction from coming to a standstill.
In addition, the CCP urged municipalities in smaller cities to promote home purchases. A video of the Chinese Communist Party secretary of Hunan province went viral because he said, “If you bought one, buy a second. If you bought 2, buy a third. Some local officials are offering 3 percent discounts to groups of buyers.
Even so, several cities in China have huge empty conglomerates and countless skeletons of unfinished apartment buildings that could house more than 60 million people. However, the real estate bubble, which somewhat fueled the country’s economic growth, burst and now, reality is hitting businesses and the regime’s money is not enough to quench the thirst for billions of dollars.
Specialist Daniel Zhou noted in a Moody’s research article, “Uncertainty over China’s growth prospects and concerns over incomplete projects will largely drive weak homebuyer demand over the next 6-12 months.”
he added, “COVID-19 disruptions in commercial activity and sales completions will also affect consumer confidence, while buyers’ expectation of lower property prices will delay property purchases.”
According to private research, home prices fell for the third consecutive month in September. Prices in 100 cities fell by 0.02 percent. The National Bureau of Statistics of China has not yet released September property market data and it won’t until October 19, midway into the 20th National Congress.
China’s central bank allowed local governments to reduce mortgage rates for loans to first-time homebuyers. More than 200 cities implemented economic measures, however, an expert from the China Index Academy group, Huang Yu, said, “Multiple easing policy measures, are needed to stabilize the property sectorsuch as relaxing curbs on purchase, re-selling and lending in second-tier cities, are necessary to stabilize the real estate sector.”
He added, “China must also step up financing for some developers and ensure housing projects which have not yet been finished are delivered to buyers.”
According to a Reuters poll, house prices will rise 2.0% year-on-year in the first half of 2023, but sales are expected to fall 15% due to a steady decline in demand.
Yu added, “The pace of recovery of the real estate market is still dependent on the pace of macroeconomic condition, COVID-19 control restrictions, and the strength of policy support.”