The Big Ideas

'The Housing Bubble That Just Won’t Pop'
'The Housing Bubble That Just Won’t Pop'
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May 9, 2021
BIG IDEA | ‘China’s cities are plagued by a diverging trend: high demand and exorbitant prices for residential properties in tier 1 cities and yet an oversupply in smaller, lower-tiered cities.’

‘People in mainland China weren’t allowed to own property until 1998.’

  • ‘Since then, home ownership rates have blossomed.’
  • ‘But explosive growth has also fueled a building boom that has saddled some of the nation’s biggest property developers with precarious levels of debt.’

‘China’s massive property sector sops up steel and cement for major projects each year, creating a symbiotic relationship with the country’s construction firms.’

  • ‘One estimate put the real estate industry’s contribution to China’s GDP at 7 percent in 2019, with related sectors like home furnishings bringing up the total to 17.2 percent.’

‘The industry is also important for Chinese consumers as a mechanism for investment.’

  • ‘A 2018 study estimated that Chinese citizens put nearly three-quarters of their savings into property, compared to just a third for Americans.’
  • ‘ “Chinese end-users have limited room to deploy their savings into alternatives outside China,” says Henry Chin, head of Asia Pacific research at real estate and investment group CBRE. With restrictions on overseas investment, there’s one clear outlet for their funds: “buying up properties.” ’

‘China’s cities are plagued by a diverging trend: high demand and exorbitant prices for residential properties in tier 1 cities and yet an oversupply in smaller, lower-tiered cities.’

‘Although China had no property market at all in the 1980s (everything was state-owned), it is now home to the world’s biggest and most powerful property developers.’

  • ‘Big developers in China acquire state land at auction and then build high-rises developments and sell them to consumers. The scale is breath-taking.’
  • ‘The big developers then push into other cities, borrow heavily, and build even bigger projects.’
  • ‘And for that reason, the top 50 Chinese real estate developers now have 60 percent of the market, up from 26 percent in 2013, according to research conducted by UBS.’
  • ‘The industry has also driven China’s urbanization, with nearly 60 percent of people in China living in an urban area in 2017 compared to less than a fifth in 1978.’

‘The Chinese government started to rein in property developers over debt concerns in 2018.

  • ‘ “In 2018, 2019, all through those two years, we did see some underperformance at the second-tier, smaller developers,” Chin says.’
  • ‘ “The journey moving into 2020, because of Covid-19, things have changed quite substantially.” ’

‘In order to encourage GDP growth, government officials prioritized growth instead of correcting debt problems.’

  • ‘But now that China has made strides in its economic recovery, the reins are getting tighter.’

‘Some worry that China is careening towards a housing crisis much like the United States in the late 2000s.’

  • ‘Layers of debt are piling up as individuals take out loans to afford home ownership, and real estate companies tried to manage massive projects.’
  • ‘Beijing worries massive debt could undermine the state-dominated banking sector.’

‘As bad debt emerged as a narrative in China’s economy, major players such as Evergrande, the world’s largest real estate company, were swept up in liquidity concerns.’

  • ‘The push towards deleveraging started a couple of years ago, but the policy was codified with the nation’s “three red lines” policy in fall 2020.’

‘Regulators set three debt-oriented criteria and accordingly limit how much more debt companies are allowed to take on annually with a graduated system.’

  • ‘At the most extreme end, any company that crosses all three lines isn’t allowed to grow its debt at all.’

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