The real estate market used to be one of the biggest drivers of economic growth in China, but it has been on a downward spiral for the past five years with no signs of weakening. According to research by CRIC Real Estate, sales of the top 100 developers in China dropped by 3.2% year-on-year in January, totaling 227.6 billion Chinese yuan.
The value of real estate continues to plummet, as people are reluctant to buy properties and developers are on the brink of bankruptcy.
On January 27, the state-owned developer Vanke predicted a record loss of 45 billion yuan (6.2 billion USD) for this year, further fueling concerns about the Chinese real estate industry.
Vanke, headquartered in Shenzhen, employs 130,000 people and ranks as the fifth largest construction company in China. It has been listed on the Shenzhen Stock Exchange since 1991.
Recently, Vanke’s housing sales hit a 10-year low, and the company continues to face debt crisis. On January 27, Chairman Yu Liang resigned, but will remain on the board; CEO Zhu Jiusheng also resigned citing “health reasons.”
In 1998, China witnessed the emergence of a nationwide housing market. At that time, only one-third of the population lived in cities, but later the urban population increased to two-thirds, with an additional 480 million people moving from rural areas to cities, presenting a huge opportunity for construction companies and developers.
Real estate became a new investment target, attracting a surge of capital into the sector. From 2007 to 2022, property prices in China soared sixfold. Local governments relied heavily on land sales for revenue, driving a development frenzy.
The real estate industry accounts for about a quarter of China’s GDP and nearly 80% of household assets.
This property boom was debt-driven, with several large real estate companies engaging in aggressive high-leverage operations, known as the “three highs model” – high debt, high leverage, and high turnover in real estate.
Many developers acquired land from the government at low costs and sold it at significantly higher prices. The strategy was to rapidly capture market share, leading to extensive borrowing from banks in the hundreds of millions to buy land. With good government relations, developers could swiftly acquire land, launch projects, and start selling units, often starting on new projects even before the previous ones were completed and funds were recovered.
In August 2020, the Chinese government introduced the “three red lines” policy to restrict financing conditions for real estate developers and strengthen regulation of the real estate industry. Many developers failed to meet the new rules, leading to funding chain breaks and a wave of bankruptcies, making government policies a catalyst for the housing market crisis.
In 2021, China’s largest developer Evergrande defaulted on over 300 billion USD, triggering a crisis in the Chinese real estate market. Two other real estate giants, Country Garden and Sunac, also defaulted in 2022. According to S&P, over 50 Chinese real estate companies have defaulted or failed to repay debts from 2021 to 2023.
Analysts point out that China’s property crisis is “self-inflicted” by the government, as regulatory bodies allowed real estate companies to heavily borrow money to fund the growth strategy of “at all costs” over several decades.
Specifically, banks lacked regulatory authority and the presale system lacked supervision. Developers deposited down payments from buyers in banks, then requested funds with explanations sent to the China Housing Authority. However, once approved by the authority, banks had no say in how developers used the funds, whether for buildinghouses or diverting them elsewhere.
Moreover, in 2020, the Communist Party suddenly imposed lending restrictions, heavily intervening in the market to halt funds flowing to developers. This led many companies to face financial shortages and subsequent closures due to an inability to repay debts.
After strict regulation, developers struggled to obtain loans, plunging the real estate market into stalemate. Additionally, pandemic lockdown measures prevented people from viewing properties. When restrictions eased, worsened job markets led to layoffs and salary cuts, reducing consumer spending and further exacerbating the housing market imbalance.
Starting from 2022, housing prices in China began to decline, with real estate values experiencing the largest drop in nine years by August 2024. Debt-ridden developers left unfinished buildings and new housing units. As of May 2024, 400 million square meters of newly completed apartments remained unsold.
By the end of 2023, household debts had reached 145% of disposable income per capita, putting increasing financial pressure on homeowners. The mortgage delinquency rate in China surged to the highest level in four years by the end of 2023, leading to a wave of credit cuts.
Some homeowners were forced to sell properties at distressed prices. The average house prices in Chinese cities plunged by around 30% from 2021, allowing buyers to purchase a property for tens of thousands of yuan. Currently, housing prices in 25 provinces and 95 cities across China have seen a cliff-like decline, with many cities in the traditionally prosperous South experiencing drops of over 50%.
The most significant investment for Chinese families is often in real estate, but the continuous slump in the property market is eroding household wealth, stifling domestic consumption and dealing a heavy blow to the economy.
(Report referenced from Bloomberg)