Boom, bust and borrow: Has China’s housing market tanked?

[Music] between 2020 and 2022 China's booming property Market came to a crashing halt complexes turned into ghost towns residents organized mortgage boycotts [Applause] and a pandemic shook the global economy the unprecedented crisis exposed the economic vulnerabilities of China's real estate sector one company in particular took Center Stage evergrand evergrant evergrand defaulted on major Bond debts evergrant one of China's largest developers suffered some of the biggest losses its founder Hui Kayan was once the second richest person in Asia then in 2021 his wealth plunged 17.2 billion US dollars since 2017 he's lost over 90 percent of his fortune and his net worth in 2023 stood at 3 billion US Dollars the post reached out to over 50 social media users in China and spoke with about 10 who refused to be identified out of fear of backlash they are all home buyers trapped paying mortgages on half finished Flats one had even moved in because they had nowhere else to go another a 30 year old man told us that he is spending half his income on paying a mortgage as well as rent on a separate place he said he tried talking to the developer but eventually stopped getting replies he and other homeowners began organizing a protest that was halted by people in uniform more local homeowners started receiving anonymous calls warning them not to escalate their action one told us that he was detained for 10 hours and he eventually quit the WeChat group and laid low it's now been more than a year but he's no closer to moving into his dream home which seemed Within Reach not long ago when the economy appeared to be thriving so how did China's housing market go from boom to bust China has relied on its massive property industry as a main driver of its economy for decades China's real estate related industry is account for about 30 of GDP in China which is very significant behind the Colossal sector is a prevailing housing system called the pre-sale Market it's a system that exists in many countries in the world it means developers can sell homes before they are fully built but there are two ways Mainland China's Market puts home buyers at unusual risk we can understand by comparing to a city like Hong Kong in Hong Kong home buyers pay a down payment but are not required to pay the full amount up front while in mainland China the cost of the property is required to be paid in full with a combination of a down payment and bank loans in Hong Kong the down payment is supervised by a third party like law firms but in mainland China the down payment goes straight to the developer's bank account with the pre-sale profits developers can launch a construction project without having to put up sufficient funds of Their Own but in the face of a cash crunch the money increasingly goes toward mandatory spending like paying workers leaving homes have built in Mandarin they have become known as lonue Lo meaning rotten tail buildings so why are there so many la nue lo the long-standing issue can be traced back to the beginning of China's Market boom China is a late Comer in urban Housing Development compared to its Global peers but since the 1990s China's housing market has been on a fast track like any booming Market its demand was created by the people in China's case that demand was caused by migration from the rural areas to big cities the scale of China's urbanization has been unprecedented in human history the urban population Rose 37 percent between 1990 and 2021. more people moving to cities meant the need for more Flats seized the opportunity early in the urban boom in 1994 the Chinese government introduced the pre-sale housing system arguably to satisfy the surge in demand in 1996 evergrand was established just in time for the 1998 housing reform when Beijing moved away from its socialist housing distribution system to a market-based approach that paved the way forever Grant to go from nothing to becoming a Chinese property giant earning 73 billion US dollars in annual revenue at its peak in 2020. according to its website it currently owns more than 1300 projects in 280 cities across mainland China while it is China's largest developer in terms of contracted sales it's also one of Asia's largest borrowers evergrand uses the borrowed money largely on further land purchases and construction projects in hopes of earning future profits from resale but what happens when prices drop um and that's exactly what happened property prices fell in the covid-19 pandemic [Music] months after the first covet cases were detected in Wuhan China began a Crackdown on borrowing with a policy known as three red lines it put a cap on three debt ratios of a developer a liability to asset ratio of less than 70 percent a net debt to equity of less than 100 percent and a cash to short-term debt ratio of one many of China's developers were not able to fulfill the requirements overstepping one of the three lines as a result they lost funding which increased their financial burden when covet cases surged and large cities like Shanghai went into lockdown housing sales were frozen and prices dropped starting in August 2021. evergrand went into default later that year and chairman way stepped down but who's to blame experts say the three lines policy could have worked but was introduced at the wrong time I wouldn't blame the red the three red lines I would just blame the fact that this sector became too big because it was bringing so much growth and employment that nobody wanted to stop it we couldn't expect there will be Hobbit happening in 2020. so that Black Swan event nobody could prevent so that that just happened to be all happened together home prices eventually stabilized in January 2023 after Beijing lowered mortgage rates helped complete some pre-sold housing projects and subsidized developers finances the government even sent signals that it may ease the three red lines debt cabs does that mean China has fixed its housing market it's clear now China has a lot more to reckon with than just policy it's a demand issue it's not only a regulatory issue it's a demand issue because China's population is falling the demand isn't really there um so so I I this is important to understand that the solution can not only be lifting restrictions because it will not solve the full problem for as long as most can remember China's Rising population has been an economic advantage to its labor force but that number is now dropping fast the working population went from 997 million in 2014 to 986 million in 2021. the UN predicts it will start declining even more rapidly in the 2030s through the end of the century you don't have the new Commerce into the housing market so the demand is weak first population is falling sick on disposable income is not growing stacked and third the youth is unemployed to a large extent 20.8 percent what's next for China's housing market s again when China's Workforce moved from the countryside to the city in the 1990s it caused decades-long economic growth and established a housing market that relied on pre-sales to speed up Urban expansion as China's pace of urbanization Trends down demand in the market may have reached a bottleneck I think therefore we are expecting by year end we will see rather stable ligation of the the price correction so we will not really see the further drop of the pricing in in housing market and then year two and year three going forward we will have a less Supply coming up so that will also help the market stabilization it may well signal that China has once again reached a turning point [Music] [Music]

Channel: South China Morning Post

Views: 5,786

Keywords: China economy, China housing market, China housing market crash, China real estate, Evergrande crisis, SCMP, SCMP explains, South China Morning Post, What happened to China's economy?, What happened to Evergrande?

Id: IeUxDOZmtLg

Length: 10min 57sec (657 seconds)

Published: Sat Jul 08 2023