Recent economic data suggests that China’s real estate boom, which started in 1999 with home ownership becoming privatised, seems to be heading for a doom now. The country is staring at its first real estate decline in six years, triggered largely by the Evergrande fiasco.
The Evergrande Group of China, which is one of the largest real estate companies globally, has been in headlines lately over its inability to pay interest on its huge debt obligations. Many now fear that the company is insolvent as its share price has dropped over 80% in the last one year, hitting a 10-year low.
Evergrande Crisis & its implications
Evergrande built properties and sold it long before completion. While many Chinese customers bought such properties from Evergrande seeing it as an investment, many others bought it as they were eager for a new home. Evergrande then used all the money to build more and venture into businesses other than real estate as well. It branched out into theme parks, bottled water business, soccer club ownership etc. This continued acquiring of assets and reckless expansion over the years has led Evergrande to become world’s most indebted developer today. The company has amassed an unbelievable $300 billion in debt, an amount that is equal to ~2% of China’s GDP.
But Evergrande is not an isolated case, the entire real estate market in China is a disaster waiting to happen. If its real estate sector collapses, it could take the entire Chinese economy with it.
How China landed in the crisis
Reportedly, over 65 million empty deserted houses were built for a middle class population that never made it to these ghost cities. Construction was once considered the engine of China’s growth. Billions of dollar were borrowed by the developer to build these houses in cities, then in the outskirts and even rural China. But the occupants never came.
Today, in big cities of China, homes are not just hard to find but even harder to buy. Outside the city, one will find acres of real estate empty and barren. But one thing common to both a city and its outskirts is the ‘Debt’. It is being reported that property prices in cities were clearly inflated, but the banks never minded as they kept sanctioning loans blindly for overpriced properties. Further, these developers themselves kept borrowing recklessly from the banks and carried on with their massive construction spree.
Late notice & ignorant handling
It wasn’t until 2017 that the Chinese government began to have concerns about the rising ratio of debt. Chinese authority was forced to put a clampdown on borrowing. This caused a chain reaction in the Chinese housing market. No loans meant no buyers. No buyers meant no business. This hit the developers hard as they now had no money to pay to the creditors. The tension began translating into a housing bubble in China, signs of which had always been there but the state never bothered.
Signs that Chinese government never took into consideration
- Rate of Construction: Construction had become a mainstay for Chinese development. Reportedly, the country builds 2 billion sq m of new floorspace each year, which equals to about 1.3 times the size of the entire footprint of London. Not being able to take notice of such an extraordinary figure is something that sounds impossible. This has left China with deserted properties beyond count, such that entire nations can be housed in these deserted ghost cities.
- Inflated Housing Market: The homes are priced at 55-60 times the national income in major Chinese cities. This led to the choking of the Real Estate sector, which makes upto 30% of GDP of the state and about 78% of all assets in China.
- Rising bad loans: Year 2021 has already witnessed more than 220 Real Estate companies filing for bankruptcy. A surge in bad debt has also been seen in the property market with major Banks like the Bank of Zinjhau and Bank of Shanghai reporting 53.5% and 25.8% rise in bad loans respectively.
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