Bubble bursts in China's Real Estate sector
The Chinese real estate market has always been in the news since the infamous default on US debt by the Evergrande group. In this thread, let’s understand more about the real estate bubble in China and see if there is actually a Ponzi scheme which was swiftly executed to dupe investors and homebuyers.
Real estate - the last resort
Chinese investors haven’t gained from equity markets. While China’s GDP soared by 62 percent in the last five years, the SSE Composite Index has generated negative returns. In fact, it is yet to breach the high that the market created in 2008. Under such circumstances, alternative sources of investment becomes a default choice.
With a sluggish equity market, investors pumped up their fundings into the real estate market and China’s real estate investment soared up by 149 percent between 2010 and 2018.
Size of the real estate market
China's real estate sector accounted for 29% of the country's GDP. In other words, the Chinese economy of USD 14 trillion relies heavily on the USD 4 trillion contributed by the real estate segment.
Modest sales growth?
The number of apartments sold between 2014 and 2020 indicates a clear slowdown which wasn’t predicted well. China’s population is maturing and? population growth in towns and cities plunged by 1 percent last year for the first time since 1996. This will be a severe headwind for the future of this sector and gives an indication of the demand of steel and construction materials in this space.
Ponzi scheme?
The last decade was characterized by high demand for homes and a continued rise in housing prices in major metros of China. The shortage of houses pushes prices higher and Shanghai and Shenzhen, for example, recorded average house prices per square meter of RMB 66,801 (US$10,526) and RMB 71,209 (US$11,221), respectively, at the end of 2021.
This unaddressed demand leads to a scenario of Ponzi scheme where developers pre-sell homes (which are not even built) and use the pre-sale money to start more projects, and then collect more pre-sales from new projects.?
The property developers heavily relied on a couple of sources - deposits and presales.?
Spiraling effect on mortgages
Buyers started a mortgage boycott as the properties have not been completed. Homebuyers in over 200 projects have threatened to stop mortgage payments.?
The problem is deep rooted and severe. Banks were lending depositors money to the developers who were using these funds to build houses. Now that the mortgage payment by homebuyers are stopped, developers are not able to return funds back to the bank and this vicious cycle may end up having a domino effect on banks and lending institutions.
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Stalled projects and complemented by a severe cash crunch, developers are now forced to accept payments in wheat, garlic and peaches :)
The crisis in the property sector is not limited to homeowners and property developers. Local governments gain a significant portion of their budget from the sale of land-use rights, of which property developers are the biggest buyer. The situation is all the more alarming as the local government is expected to increase spending and to create economic activity.
Uncertainty continues to hover
Credit spreads of Chinese high-yield corporate bonds have risen significantly. There have been instances where developers like Kaisa Group, Fantasia holdings, Sunac, Cogard, Shimao, Yuzhou and Sinic Holdings have collapsed. Their bonds trade at less than 20 cents a dollar.
??????????????????According to a study by the Lowy Institute, a think tank in Sydney, Investment in housing accounts for about 11 percent of China’s GDP, and this is expected to fall closer to 7 percent by 2030. A recent development suggests that Beijing may order state-run groups to guarantee some developer bonds issued in the country’s onshore market.
While the Chinese real estate market is in doldrums, the economy is establishing itself as the tech capital of the world. Only time will tell how they fare in this attempt of rebranding itself.
Disclaimer - The views expressed in this article are of the author and do not represent the firm’s views.
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Explorer
2 年Satyaki Bhattacharya great analysis ...I see the same happening even in siliguri ... nowadays people buy land and building not to live in them but for value appreciation and pride another reason could be lack of trust in stock market
HDFC Bank | GIG Banking | Product Owner | Symbiosis | MBA in International Business Finance
2 年insightful
Writing Stock Research for Mint, Financial Express and Equitymaster, Marketbrew (By Tata Fintech) Newsletter. I am also a Mutual Fund Advisor, with 1.7M views on Quora.
2 年Excellent Read Satyaki Bhattacharya
Lifetime Listener | AI Implementation Expert | Fun Coach!
2 年I had not thought of the Chinese real estate mess as a Ponzi Scheme, but that does sum it up best Satyaki Bhattacharya! Reminds me a lot of the Savings & Loan crisis not so many years ago!
Founder @ Marquee Finance by Sagar LLC | Financial Newsletter, Global Macroeconomic Analysis | Investor | Trader
2 年Satyaki Bhattacharya It will take years for PBOC and the CCP to clean up the mess in the property sector. With worsening demographics and a crisis-hit property sector, the growth engine of the world might now have to settle for much lower long-term growth (5%).