For decades, Beijing has used investments to generate growth, with much of its spending focused on constructing new apartment buildings. State-backed banks have extended vast loans and local governments have sold bonds to support developments. Now, an unprecedented oversupply of apartments threatens China’s entire economy, while citizens are finding it impossible to purchase homes.
Property prices increased steadily from 2000 through March 2021. In cities such as Beijing, house prices continue to rise, having more than doubled in the past 10 years. Wages have not kept pace, and the house price-to-income ratio is one of the highest in the world.
In Beijing, the average home is 40 times the average salary. In Shanghai, it is about 26 times. By comparison, it is only about eight times in New York. Housing is so expensive that young people are not only putting off marriage, but are increasingly willing to share apartments and even beds with total strangers.
For decades, real-estate developers fueled the country’s debt through borrowing and construction, and companies did not worry about finding buyers.
However, empty, unsold properties now exceed 650 million square meters, or the equivalent of about 7.2 million dwellings. This figure excludes homes not yet finished due to developers’ financial constraints and unsellable second homes.
The total number of vacant units has surged an estimated 21.9 percent compared with last year, reaching at least 50 million.
In a typical free-market economy, a real-estate surplus would lead to price reductions, which would align with the population’s purchasing capacity, ultimately balancing out.
However, China’s central and local governments have implemented policies to prevent prices from declining.
From Beijing’s perspective, two issues would arise if real-estate prices were allowed to normalize.
First, it could devastate family finances, as about two-thirds of household wealth is tied up in real estate. A collapse could obliterate many families’ life savings.
Second, these properties serve as collateral for trillions of dollars in loans. China’s debt has been steadily escalating to crisis levels over the past few years, with public debt nearing 300 percent of GDP. Real estate, which constitutes 25 percent of China’s economy, represents a staggering US$8.4 trillion in debt held by banks and other financial institutions.
This raises concerns that a collapse in the real-estate sector could take the banking sector with it.
In 2020, Chinese President Xi Jinping’s (習近平) Three Red Lines policy focused on reducing the credit directed toward the housing sector to curb rising debt.
However, in response to three years of economic slowdown, Beijing resumed promoting growth through construction and encouraged lending to the housing sector. Much of this additional funding is channeled toward state-owned developers rather than private ones.
Over the past two decades, the share of the real-estate sector controlled by state-backed companies has steadily risen to 59 percent. This highlights a glaring issue with centrally planned economies: Central planning contributed to the real-estate bubble and Beijing is attempting to regulate its way out of it, resulting in further dominance by state-backed firms.
Moreover, the new easier credit policies can be expected to result in more properties being built, adding to the glut.
Easing up on credit would only exacerbate the debt crisis. The country’s 11 largest developers have assets totaling about US$1.6 trillion, and liabilities of US$1.47 trillion, leaving aggregate capital of US$272 billion. Consequently, if property values dropped by about 32 percent, the loans would collapse.
One of the country’s largest developers, Evergrande, has already filed for US bankruptcy protection, and is attempting to restructure US$340 billion of debt. Consequently, the company’s stock price has dropped to US$0.00060 per share.
Major developer Country Garden is close to defaulting, having reported a loss of US$6.7 billion in the first half of the year. In September, the company missed US$22.5 million in interest payments on US dollar bonds, but managed, before the end of a 30-day grace period, to come up with the money.
According to the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB) and Agricultural Bank of China, the number of nonperforming loans at the end of June was up 7.6 percent from January, reaching a total of US$164.8 billion.
BOC, ICBC and CCB reported increases in property sector nonperforming loans of 20 to 30 percent. China Merchants Bank has experienced a 28 percent rise in bad property debts. Analysts estimate that the quantity of property loans in danger of default is equal to 12 percent of GDP.
To stimulate demand, Beijing has decreased interest rates and down payment requirements.
However, with China’s economy experiencing a downturn and with high unemployment among young people, fewer people are willing to purchase homes.
Many of China’s new apartments are empty shells with neither sinks nor bathrooms, so, in addition to exorbitant purchase prices, buyers need cash for fixtures before moving in.
This puts further downward pressure on new home sales, which are down 20 percent, with some developers reporting that contracts to build new homes have decreased by as much as 70 percent.
Further interest rate reductions might help to stimulate demand, but with much higher rates available in the US and elsewhere, citizens would be better off moving cash out of the country.
Ultimately, there are not many possible solutions to clear out the excess properties. One would be for the economy to recover and grow to a point where citizens can afford them. This would entail a quadrupling or quintupling of the average income.
The other option is for property prices to drop significantly, which would trigger massive credit defaults, threatening the banking sector.
Antonio Graceffo, a China economic analyst who holds a China-MBA from Shanghai Jiaotong University, studies national defense at the American Military University in West Virginia.
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