Owning your own home in this country has long been thought of as the American Dream. Home ownership at any affordable cost has been the aspiration of American families since colonial times. It meant lots of hard work and sacrifice, and a long-standing debt that required monthly payments. It’s often the largest single investment an American Family can make. And it’s arguably the best way to raise children. What then is the dream of home ownership like in China?
The China Housing Market May Be Collapsing: After decades of growth in China where property developers have made fortunes and home owners have seen their net worth soar, the housing market has slowed down to nearly a crawl. New housing starts have fallen by 45% year on year, new home sales by 29%, and real estate investment by 12%. A tour of the countryside where development was once the hottest, now shows half-built apartment towers, and skeletons of housing complexes that are stuck in an unfinished state. The market has become illiquid. Developers have run out of money to pay construction costs, and many projects have stalled.
Two Major Reasons: There may be several causes for the market’s decline, but there are two discernible reasons: The restrictions on developers’ excesses, and the zero-covid lockdowns. The developers’ restrictions, known as the “three red lines,” are financial ratios—liabilities to assets, debt to equity, and cash to short-term debt. By not meeting these ratios limits, developers are forced to stop borrowing and leveraging their investments. This leads to a slowdown in construction. The zero-covid policy that pushes entire cities into lockdown status at the very onset of Covid cases is the other compelling reason. The shutdowns prevent potential buyers from finding a home thereby battering the buyer’s confidence. They further restrict general demand in the economy and remove much liquidity from the buy side of the equation.
The Home Buying “Ponzi Scheme”: To generate the liquidity needed to build homes, developers have sought to sell them before they have been built. In the past year 90% of all homes sold were presold. But lenders and developers dealing with the “three red lines” financial restrictions are still having a massive difficulty in completing projects that were started years ago. As many as twenty-eight developers have missed debt payments and/or are in the process of restructuring them. The stock of as much as ten percent of the Hong Kong listed developers has been frozen from trading. One of the largest developers in all of China, Evergrande, has defaulted on its debt. The potential home owners that put their money down for a home that has not been built may be forced to wait a long time for recompence. In some places, mortgage boycotts have risen.
The State Responds: Much of the regulation in the housing sector is managed at local levels. For over ten years some of these municipalities have established a battery of rules designed to fine-tune the markets by limiting access to mortgages, and limiting permissions of individuals to purchase homes. More recently the municipalities have been walking these regulations back making it easier to get mortgages in an effort to stimulate demand, and cool down angry protesting home owners. Local governments have been encouraged to form bailout funds in an effort to get some of the unfinished developments completed. More support could come from the Central Bank that has set aside about $30 billion to back special loans designed to aid the process of finishing partially developed properties. However, this amount pales in insignificance to the nearly $5 trillion worth of residential properties presold within the last two years that loom large on the unfinished horizon.
Can the Central Government Restore Home Buyer Confidence: A vicious cycle may be forming in the attempted relief efforts. The crackdown was designed to cool off the hot market by turning off the massive borrowing by development companies. This may lead eventually to a much larger bailout that would simply bring more developers in to request financial assistance. The government then becomes subject to being the subsidizer of all residential development. Officials have long been aware of developers overbuilding properties to satisfy the demand of people who were buying multiple houses for speculation. JPMorgan, an investment bank, estimates that since 2018 about 70% of all homes sold went to families that already owned a home and were buying more for speculation purposes.
Conclusions: The hard irony is that the population in China, like in many other countries, is aging, and demand for residential properties will soon be declining as fewer younger families will need them. In a controlled economy, one of the largest sectors that once prospered could face a dramatic collapse if the regulations and stimulus do not put the sector back on track. At further risk is the banking sector. We only need to go back to 2007/8 in this country to see what can go wrong there.
Sources: The Economist, Groaning, September 17, 2022.