The property crisis in China has contributed to the country’s economic contraction; where real estate was once the strongest sector’s growth is now facing a major slowdown. What are the factors contributing to this situation and what does this mean to China and is the global economy at risk? Let’s dive into it.
The evolution of the Chinese real estate market.
There is a contraction in lending attributed to the risks associated with the aforementioned property crisis. Loanamounts vis-à-vis the market value of the properties have increased to as high as 97% – 159%. Mortgages which were once considered as one of the banks’ safest assets is now considerably increased in risk. During the 2nd quarter of 2022, Chinese GDP only grew by 0.2%, the 2nd plunge in 3 years could mean that there is a possible financial crisis on the horizon which could lead to the implosion of the real estate market. Let’s look at some numbers to further understand this phenomenon. In 2021, 2.4 trillion dollars worth of new housing was sold in the country which accounted to both directly and/or indirectly 30% of the Chinese economy. Following the period, housing prices within the country fell for eleven straight months (as seen on the table below). Notwithstanding the fall in housing prices, as of today, there are an estimated 30 million unsold properties within the country and also 100 million units that are sold but not occupied. Families’ Livelihoods are at stake as their house(s) started losing value while having to service higher mortgage installments. Amidst all this, the government did not provide relief to the people in the form of financial assistance but instead encouraged people to buy more houses as seen in many viral videos on social media. Meanwhile, they had announced a 1.1 trillion-dollar infrastructure project which has since been delayed as most of the budgeted financing comes from sales of land/real estate sector – which dropped by 30% in the last 12 months.
Forecasted positioning of China’s economy
The future of the market seems uncertain at the moment of writing due to concern whether China can weather the double dip, further stymied by the lingering impact of Covid curbs. There isn’t any large-scale government intervention. Subsequently, under both dual-influences of the market and government, the real estate industry is filled with uncertainty. There is a possibility, such troubles can overspill into other major sectors such as :
Engineering and construction: Privately owned construction firms are feeling the crunch as they could suffer heavily due to lack of funding, project exposure and competitive advantages; paling in comparison to their government-controlled/owned counterparts.
Steel producers: As the construction industry is responsible for 55% of China’s steel demand, its slowing down could result in a large drop in steel demand. The slowdown’s effects have impacted other economic indicators such as asset investment and furniture sales. It is only a matter of time before the steel industry will follow suit.
Asset management companies: These firms hold many assets which are backed by real estate-related collateral, resulting in an exposed position to prolonged property-market slowdowns.
What is the future of the market?
The future of the market seems uncertain as of the moment of writing there isn’t a large scale government intervention announced. Under the dual influences of the market and government, the real estate industry is filled with uncertainty. These troubles have the possibility to spill into other major sectors. Notably, these sectors are:
Engineering: Such as non-state owned construction firms. They could suffer heavily as they lack the funding, project exposure and competitive advantages which are readily available to their government-controlled counterparts.
Steel producers: As the construction industry is responsible for 55% of China’s steel demand, its slowing down could result in a large drop in steel demand. The slowdown’s results are already seen in other economic indicators (asset investment, furniture sales). It would be a matter of time to spill over to the steel industry.
Asset management companies: These firms hold many assets which are backed by real estate-related collateral, resulting in an extremely exposed position to longer property-market slowdowns.
Conclusion
Following the slowdown and stagnation, many of the local governments began to relax their home buying restrictions to try to revive the real estate sector. All the while there are mortgage protests raging, many refusing to pay their mortgages. While this is going down Beijing hasn’t announced any type of large-scale support/aid. This instability and lack of large scale government support makes the whole market a very risky investment. A safer way to invest would be into commodities. Seeing how the real estate market could spill over to many other aspects it would be safer to use credit lines that have secure collateral. To make the most out of these investments, reputable companies should be used and seeing as the Chinese real estate industry might struggle for a while, it would be a great time to invest in these commodities.
References
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https://www.cnbc.com/2022/09/02/morgan-stanley-chinese-stocks-could-plunge-if-real-estate-gets-worse.html - CHANGE, E. (2022) “Here’s where China’s real estate troubles could spill over” l https://www.cnbc.com/2022/08/12/heres-where-chinas-real-estate-troubles-couldspill-
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https://www.grid.news/story/global/2022/08/29/chinas-mortgage-boycotts-why-hundreds-of-thousands-of-people-are-saying-they-wont-pay/ - BLOOMBERG (2022) “China’s Property Crisis Burns Middle Class Stuck With Huge Loans” l https://www.bloomberg.com/news/articles/2022-07-24/china-s-property-crisis-bur
ns-middle-class-stuck-with-huge-loans?leadSource=uverify%20wall - POWER, J. (2022) “As China’s property crisis grows, is the global economy at risk?” l https://www.aljazeera.com/economy/2022/8/30/what-chinas-property-crisis
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https://www.hlb.global/the-real-estate-industry-in-china-an-overview/
