Economic Domino: The Chinese housing crisis, a threat to the world

Real estate in China is going through a crisis that could affect the entire national and even global economy. State of affairs in a sector that has been suffering for many months.

Colossal. More broadly, real estate accounts for about a quarter of China’s GDP. Housing reform (1998) in China, which created a real real estate market, led to a meteoric boom in the sector, fueled by social norms, with the acquisition of property often being a requirement for marriage.

Banks funded this frenzy by lending to developers and buyers. Mortgages still account for nearly 20% of outstanding loans in the Chinese banking system today, according to a recent report by ANZ Bank.

In China, most developers sell homes through a pre-sale system, in which properties are purchased before construction begins. According to the financial information agency, the country now has 225 million square meters of living space available for completion Bloomberg.

The rise of developers has been accompanied by rising real estate prices. This situation has long worried the government because many Chinese no longer have the means to buy real estate. Authorities are also concerned about the massive indebtedness of developers, which poses a risk to China’s economy and financial system.

Therefore, in order to reduce the sector’s indebtedness, Beijing tightened the conditions for access to credit for developers in 2021, which dried up sources of financing for already indebted corporations. A wave of defaults followed, particularly from Evergrande, the former Chinese real estate leader, which was choked by a staggering debt of around $300 billion.

The uncertainties surrounding Covid-19, which are weighing on household incomes, are also discouraging individuals from buying a property, further exacerbating the crisis.

In September 2021, Evergrande’s demise sparked protests from concerned buyers outside the company’s headquarters in Shenzhen, southern China. In June this year, a new form of protest emerged: the home loan repayment strike.

Faced with the delay in work, owners of homes bought before construction have announced they will stop all payments until work resumes. Within a month, this payment strike has spread to more than 300 real estate projects in 50 cities in China.

China is the second largest economy in the world. Given the country’s interconnectedness with the rest of the world, any contagion from the housing crisis to China’s financial system will have international repercussions, analysts say.

“If defaults increase, it could have large and serious economic and social consequences,” warns the rating agency Fitch Ratings. As early as May, the American Federal Reserve (Fed) estimated that an intensification of the real estate crisis in China could have consequences for the country’s financial system. In such a scenario, the crisis would affect world trade, the Fed stressed.

Analysts say a bailout for the sector is unlikely. Such a bailout would have the perverse effect of “shifting all the risk onto the banking sector or the government,” said Ken Cheung, an analyst at Japanese bank Mizuho. At the risk of having the opposite effect than intended.

Property owners and developers would be tempted to shirk their responsibilities and stop paying if they saw the state intervene, Mr Cheung stressed.

Analyst Chen Shujin from the American investment bank Jefferies recommends that local authorities, developers and owners could negotiate interest waivers or deferrals of monthly payments in individual cases.