China’s Real Estate Market
China's real estate sector, crucial for economic growth, is experiencing challenges, with major companies like Evergrande defaulting. The government has introduced regulatory measures and financial support to stabilize the market, amid predictions of declining home demand.
China's real estate sector has been a cornerstone of its rapid economic growth, serving as both a symbol of prosperity and a source of challenge. From the late 1990s, the sector has seen unprecedented expansion, driven by the country's opening to foreign markets and a massive urban migration. However, this boom has also led to significant financial strain, culminating in a crisis that saw giants like Evergrande grappling with insolvency. This article provides commentary on the trajectory of the real estate boom in China, from its initial surge to the present challenges, including the government's response, the impact of regulatory measures, and the potential future scenarios under Xi Jinping's continued leadership.
The Real Estate Boom and Its Aftermath
In China, the real estate boom began in the late 90s in line with the country's gradual opening to foreign markets, and real estate ownership has established itself as one of the most significant economic drivers. This phenomenon was accentuated by the massive migration from the countryside to the big cities, further stimulating real estate development. Buying a second property as an investment became an increasingly widespread strategy with a constant increase in prices up by six times in fifteen years. The growth of the sector also gave rise to real estate giants like Evergrande and a financial industry that supported expansion with loans to builders and homeowners. In August 2020, due to a slowdown in the domestic market caused by the pandemic, the crisis in the real estate sector reached its highest level.
The Chinese real estate sector has long been considered a vital growth engine for the world's second-largest economy and accounts for about 30 per cent of the country's GDP. To cope with the crisis, since 2020, the government has established the "three red lines" for companies: 1) Debt-to-assets ratio not exceeding 70 per cent; 2) Debt-to-equity ratio not exceeding 100 per cent; and 3) Short-term debt-to-liquid assets ratio not exceeding 100 per cent.
The main players are Evergrande and Country Garden, two of the largest real estate companies in China, founded in 1996 and 1997, respectively. Both have played a significant role in the urbanization process and the real estate bubble in the country; today, both companies are in default. Country Garden has liabilities of about USD 190 billion and more than 3,000 ongoing projects.
Government Response and the Latest Developments
On January 29, 2024, the Hong Kong court ordered the liquidation of Evergrande, the real estate giant has registered over USD 300 billion in debt.
The demand for new homes in China is expected to decrease by about 50 per cent over the next ten years, according to the latest 2024 report from the International Monetary Fund. Over 90 per cent of Chinese families own at least one home. In Hong Kong, house prices fell by 7 per cent in 2023 and by more than 20 per cent compared to 2021. In 2024 a further decline in prices is expected. To support the real estate sector, the Chinese government approved RMB one trillion (EUR 125 billion) of new government bonds to be issued at the end of 2023 for 2024.
Future Outlook Under Xi Jinping's Leadership
Currently, in China, there are apartments for three billion people against a population of 1.4 billion. Facing the liquidity crisis affecting real estate groups in China, the government decided to extend support policies and adopt measures to help the struggling sector, including facilitating access to credit and postponing loan repayments for a year.
Cities like Beijing and Shanghai have relaxed restrictions on home purchases in mid-December, also reducing down payment quotas for first and second homes. In January 2024, China promoted loans with a "White List" mechanism, asking state banks to increase loans to certain centrally approved residential projects.