Has China’s housing market tanked?

Summary

Between 2020 and 2022, China's property market faced a severe downturn, with Evergrande—a major developer—at the center of the crisis. Due to pre-sale practices and high debt, many homebuyers were left paying mortgages on unfinished properties. Evergrande's financial collapse exposed deeper economic vulnerabilities, compounded by government regulations and the COVID-19 pandemic. As demand for housing shrinks due to a declining population, China's once booming real estate sector is struggling to recover, signaling long-term challenges despite government interventions to stabilize the market.

Takeaways

• 🏗️ China's property market experienced a significant downturn between 2020 and 2022, leading to ghost towns and mortgage boycotts.
• 💸 Evergrande, one of China's largest developers, faced massive losses and its founder's wealth plummeted by billions.
• 🏢 Homebuyers are trapped, paying mortgages on unfinished properties, with some living in incomplete flats due to lack of alternatives.
• 🏦 The pre-sale market system in China requires full payment upfront, putting homebuyers at risk if developers fail to complete construction.
• 📉 The Chinese government's 'three red lines' policy restricted borrowing, exacerbating the financial strain on developers like Evergrande.
• 🚨 The COVID-19 pandemic and subsequent lockdowns froze housing sales and caused prices to drop, leading to defaults by major developers.
• 🌐 The issue of 'lonue Lo' or 'rotten tail' buildings stems from developers misusing pre-sale funds, leading to incomplete constructions.
• 📈 China's housing market boom was fueled by unprecedented urbanization and migration to cities, creating a surge in demand for flats.
• 📊 The government's recent measures, including lowering mortgage rates and subsidizing developers, have helped stabilize housing prices.
• 👶 A declining population and reduced demand are significant challenges for China's housing market, indicating a potential long-term demand issue.
• 🔄 The market may be reaching a turning point as urbanization slows and the demand for housing could be peaking, signaling a need for a new approach to urban development.

Q & A

What major event caused China's property market to crash between 2020 and 2022?

The unprecedented crisis that exposed the economic vulnerabilities of China's real estate sector was the pandemic that shook the global economy.

Which company was particularly affected by the property market crash and what were the consequences?

Evergrande, one of China's largest developers, suffered major losses. It defaulted on major bond debts, and its founder Hui Ka Yan's wealth plunged by 17.2 billion US dollars in 2021, losing over 90 percent of his fortune since 2017.

What is the situation faced by home buyers who are paying mortgages on unfinished flats?

Home buyers are trapped paying mortgages on half-finished flats, with some having moved into incomplete buildings due to lack of other housing options. Many are spending a significant portion of their income on both mortgages and rent.

How does the pre-sale market system in China differ from that of Hong Kong and what risks does it pose to home buyers?

In China, home buyers are required to pay the full cost of the property with a combination of a down payment and bank loans, while in Hong Kong, buyers only pay a down payment. In China, the down payment goes directly to the developer's bank account, unlike in Hong Kong where it is supervised by a third party, putting home buyers at risk if developers misuse the funds.

What is the term used to describe unfinished buildings in China and why are they a problem?

Unfinished buildings in China are known as 'lonue Lo' or 'rotten tail' buildings. They are a problem because developers may use pre-sale profits for other projects instead of completing the buildings, leaving many homes unfinished.

What role did the Chinese government's policy play in the housing market boom and what was Evergrande's role?

The Chinese government introduced the pre-sale housing system in 1994 to satisfy the surge in demand during the urban boom. Evergrande was established in 1996 and took advantage of the market-based housing approach, becoming a property giant with significant annual revenue.

What were the 'three red lines' policy and how did it affect developers like Evergrande?

The 'three red lines' policy was a crackdown on borrowing that put caps on three debt ratios for developers. Many developers, including Evergrande, could not meet these requirements, leading to a loss of funding and increased financial burden.

What external factors contributed to the housing market crisis according to the experts?

Experts suggest that while the 'three red lines' policy could have worked, it was introduced at the wrong time. The COVID-19 pandemic, a Black Swan event, was an external factor that nobody could have predicted and it contributed significantly to the crisis.

What recent government actions have been taken to stabilize the housing market?

The government has taken actions such as lowering mortgage rates, helping complete pre-sold housing projects, subsidizing developers' finances, and signaling a potential easing of the 'three red lines' debt caps.

What demographic challenges does China face that could impact the housing market?

China's population is falling, with the working population decreasing from 997 million in 2014 to 986 million in 2021. The UN predicts a more rapid decline in the 2030s, which could weaken demand in the housing market.

What are the expectations for China's housing market in the coming years?

Experts expect a stable correction of housing prices by the end of the year, with less supply coming up in the following years, which could help stabilize the market. However, the demand issue due to population decline and other economic factors suggests a more complex situation than just policy adjustments.