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China property price crash: Developer defaults leave nationwide house costs falling amid a widening economic slowdown

By Nicole Willing

Edited by Vanessa Kintu

16:45, 12 October 2022

A hammer raised above a toy house with the flag of China in the background.
What does the Chinese housing market crash mean for the wider Chinese economy Photo: Paymaster / Shutterstock

The Chinese housing market collapse is threatening to expand into a wider financial crisis with the country’s largest property developers sagging under large debt burdens and consumers losing their investments in failed construction projects.

Signs of a Chinese property market crash emerged in August 2021 with reports that Evergrande Group (3333), China’s second largest property developer, had warned the Guangdong provincial government that it was close to running out of cash. The company, laden with more than $300bn in debt, has since defaulted on payments and is in the process of restructuring.  

What does the Chinese housing market crash mean for the wider Chinese economy And what are the global implications of a property market collapse in the world’s second largest economy?

In this article we look at the impact of the Chinese housing market bubble coming to an end.

Housing crash explained

What is a housing crash? Property prices tend to rise and fall in cycles. They reach a peak or bubble – when average house prices exceed their fundamental value, cooling the market. The cooldown can take the form of a gradual decline in prices or a rapid crash.

Housing bubbles can occur when excessive lending results in homeowners taking on larger mortgages than they can afford, either because of predatory lending practices or a change in their economic circumstances. When property prices collapse, these homeowners can be forced to sell, increasing the supply of houses on the market.

The previous Chinese property bubble in residential and commercial real estate saw average prices triple from 2005 to a peak in 2009. An environment of low interest rates, cheap credit for construction and property purchases, a lack of access to foreign assets for Chinese investors and cultural factors encouraging homeownership drove up demand in China’s housing market.

In 2011, home prices in Beijing and Shenzhen soared by 140% in five years. Investment in residential property as a share of China's gross domestic product (GDP) tripled from 2% in 2000 to 6% in 2011 – the same level that the US housing market reached before it crashed in 2007.

The Chinese government was accused of deliberately bursting the bubble in the summer of 2021 because of concerns that middle-class families could no longer afford homes in many cities. The China house market crash contributed to a slowdown in the Chinese economy in 2012.

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Evergrande collapse precipitates fresh housing crash

The slow-motion collapse of Evergrande – whose lenders appointed a receiver last month to seize its Hong Kong headquarters – touched off the latest China housing market crash in 2022 as property developers face a new debt crisis. 

In anticipation of heavy losses on loans, Chinese banks have started tapping the bond markets for 30% more funds than last year to shore up their reserves. US and European companies had substantial exposure to Evergrande through corporate bond holdings, increasing the risk of problems beyond China.

The property sector accounts for one-fifth of China’s GDP. A Chinese housing market crash has implications for the global economy as well as China’s domestic growth. 

Logan Wright, a Hong Kong-based partner at consultancy Rhodium Group, told the FT that the collapse of China’s housing market is a “slow-motion financial crisis”.

Data from China’s National Bureau of Statistics shows that real estate development declined by 7.4% from January to August this year – 1.0 percentage point more than in the first seven months. Commercial housing sales totalled CYN8.59trn ($1.19trn), down 27.9%, while residential sales decreased by 30.3%.

Growth rate of investment in real estate development

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Average prices for new homes in 70 major Chinese cities fell by 1.3% year-over-year (YOY) in August, compared with a 0.9% year on year decline in July. Prices were down in 50 of 70 the cities. It was the fourth consecutive month of decline and the fastest fall since August 2015.

New home prices fell by 0.3%, the most since November 2021, after coming in flat in June and July, as some homebuyers boycotted paying mortgages on unfinished projects that were pre-sold.

The Chinese government’s zero-Covid policy has restricted the population’s movements, reducing economic activity and property sales, and also slowing construction projects.

In a sign of the extent of China’s property crisis, Country Garden, the country’s largest property developer ahead of Evergrande, reported that its profit in the first half of 2022 plummeted by 96%.

“In 2022, the property sector faced myriad challenges, including the market’s weakening expectations, sluggish demand and a fall in property prices,” the company said. “All these exert mounting pressure on all participants in the property market, which has slid rapidly into severe depression. The harsh business environment in which only the fittest can survive means even higher requirements for businesses’ competitive strength.”

Over 30 Chinese property companies have defaulted on international debt payments and privately developers have issued profit warnings. The debt crisis is reaching into the banking and asset management sectors and has seen indebted developers stop construction projects.

The fall of the Chinese renminbi (CNY) to its lowest level against the US dollar (USD) since the 2008 financial crisis has compounded the challenge for China’s property developers, the country’s largest issuers of dollar-denominated bonds. The strength of the dollar increases the cost of refinancing debt in renminbi.

Chinese renminbi (CNY) price chart

The Chinese housing market crash is contributing to a rapid slowing of the Chinese economy, which has been the engine of global growth for more than a decade.

The World Bank has revised down its forecast for Chinese GDP growth to 2.8% in 2022, down from 8.1% last year. By comparison, Chinese GDP grew by an average of 10.4% annually from 2000 to 2009 and by 7.7% from 2010 to 2019. China had set a target for this year of 5.5% GDP growth, which would already have been a three-decade low.

What is the outlook for the Chinese housing market?

The Chinese government is taking steps to stabilise the property market, cutting interest rates on mortgages, reducing down payments and relaxing purchase requirements.

“The real estate crisis will put pressure on economic growth if home sales do not pick up. Infrastructure stimulus has yet to impact growth as local government spending has been split between finishing uncompleted homes and infrastructure investment,” according to Iris Pang, Chief Economist, Greater China, at Dutch bank ING. 

“External demand could be weaker in 2023. If the real estate crisis and decisions over Covid measures cannot be resolved (at least partially) China could face a tough year ahead, especially in manufacturing.”

The International Monetary Fund (IMF) on 11 October, downgraded its forecast for China’s GDP growth, citing the “rapidly weakening” property sector. The IMF now expects GDP to rise by 3.2% in 2022, down by 0.1 percentage point from its July forecast, and by 4.4% in 2023, down by 0.2 percentage point from the previous forecast.

“A worsening of China’s property sector crisis could spill over to the domestic banking sector and weigh heavily on the country’s growth, with negative cross-border effects. And geopolitical fragmentation could impede trade and capital flows, further hindering climate policy cooperation. The balance of risks is tilted firmly to the downside, with about a 25 percent chance of one-year-ahead global growth falling below 2.0 percent—in the 10th percentile of global growth outturns since 1970,” the report stated.

Analysis by data provider Trading Economics predicted that new home sales in China will continue to decline for the rest of the year and begin to pick up in early 2023. Sales are forecast to total CNY6.7trn by the end of this quarter, rising to around CNY8trn in 2023 and CNY100trn in 2024, based on its econometric models.

Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before making any investment. And never invest or trade money you cannot afford to lose.

FAQs

What is happening with China’s housing market?

The Chinese housing market is under pressure from a debt crisis that has seen developers unable to complete projects and repay loans.

Is China’s real estate market going to crash?

The Chinese property market is showing signs of collapse, with home prices in August falling at their fastest pace since 2015, according to data from the National Bureau of Statistics.

What happens if China’s housing bubble bursts?

China’s property market collapse is contributing to a sharp slowdown in the world’s second largest economy, weighing on the global economy, which is also under pressure from the ongoing energy and geopolitical crisis in Europe.

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The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
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