All you need to know about the China real estate crisis

We know that China real estate has been in trouble for some time now- two of China’s real estate giants Evergrande and Country Garden defaulted on their debt repayments and are facing liquidation petitions. The reason why China real estate and allied industries are very important to its economy is- the industry contributes to ~30% of the GDP.

This article attempts to explain the following aspects about the China real estate crisis:

1.?????? Why are Chinese more drawn towards real estate?

2.?????? What the government is currently doing and whether it is working

3.?????? A peek into the Evergrande crisis and Country Garden default

Happy reading! ??

To understand why China real estate is very important to its growth, we need to ask the question

Why are Chinese more drawn towards real estate?

Chinese investors are drawn to real estate investment as an easily understood investment category providing price appreciation. Apart from investment purposes, owning a house is very important for the Chinese for the following reasons:

·???????? Home defines the range of life, a base to carry ancestral line and is a symbol of status and wealth

·???????? People of China tend to buy their first home between 22-30 years of age because they have the culture of ‘getting married with a house’

·???????? China was a ‘feudal’ society and has remained ‘semi-feudal’ until the national liberation in 1949. A feudal society is a farming community, where land is the main source of national economy and thus is a symbol of wealth, this mentality has remained with the Chinese till date

·???????? The Chinese regulation offers very little protection to tenants where landlords can easily kick tenants out for higher rent/sale of property. So the western concept of ‘Why buy when you can rent’ does not work in China

·???????? Their sense of insecurity is caused by lack of social security- the government has been unable to create welfare around healthcare, pension and education that the civilians think it’s absolutely necessary to create a security for themselves in the form of a house

Then why are the people of China not buying houses now? Majorly because of three reasons:

·???????? Potential homebuyers are increasingly downbeat about their job security and future earning capacity. A recent survey by the China Index Academy says that less than 20% (of the respondents) plan to buy a home during 2024, down from 30% last year

·???????? There is a lot of caution around unstable real estate developers defaulting on new project deliveries

·???????? China has an ageing population

What is China government currently doing for its real estate crisis?

The following measures were introduced in 2023 for first-time buyers:

·???????? Down payment thresholds were brought down

·???????? Minimum mortgage interest rates were reduced

·???????? Requirements to qualify as first time buyer were also reduced

Apart from this,

·???????? China is taking measures to reduce interest rates for the existing mortgages of millions of house owners

·???????? To make the ageing population buy more homes, the government introduced rollover of loan to the next generation

·???????? Credit support stood at 469Bn yuan by end of Mar, though this is well below the crisis’ requirement

There was some immediate recovery seen from these actions but there is not much hope in the long run for the real estate sector.

Story time!

Let’s understand a little about the fall of two giants in the Chinese real estate market. The three largest China real estate players used to be Country Garden, Evergrande and Vanke in that order.

What happened to them?

Evergrande crisis:

Evergrande crisis is important to understand because Evergrande’s failure is one of the first times the world came to know about China’s real estate crisis.

China’s Evergrande was the second largest real estate player in China, founded in 1996. They sold homes to upper-middle class people. In 2018, Evergrande became the most valuable real estate player in the world but the company collapsed financially in 2021, starting the China real estate crisis. The company filed for bankruptcy in the US in 2023 and was liquidated in Jan 2024. Evergrande is said to have defaulted more than $300 bn, (assets stood at $240 bn). The company did heavy borrowing to build houses for middle-class Chinese, but too many houses were built and there were not enough people to buy. Long story short, in Jan 2024- the court ordered liquidation of Evergrande for lack of long term plan.

Country Garden default story:

Country Garden is the biggest property developer in China and it also defaulted on its debt repayment. Country garden has a debt of $205 bn. Recent news says that the company was issued a liquidation petition and is currently carrying out a liquidation analysis.

Is Vanke, the third largest real estate player out of this risk?

‘Insolvent developers must be prepared for bankruptcy’ Chinese housing ministry warned last month. Moody’s ratings revised Vanke’s rating to junk. So we cannot safely say Vanke is out of liquidation risk.

What do you think is the path for China real estate recovery?

Feel free to share any feedback! ??