cross-posted from: https://mander.xyz/post/42696039

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Once one of the country’s biggest growth drivers, China’s property market has been in a downward spiral for four years with no signs of abating. Real estate values continue to plummet, households in financial distress are being forced to sell properties, and apartment developers that racked up enormous debt on speculative projects are on the brink of collapse.

There was some optimism that government measures to end the crisis had been working to reinvigorate the market, but in March, government-linked developer China Vanke Co. reported a record 49.5 billion yuan ($6.8 billion) annual loss for 2024, showing just how deep the problems run. Then in August, property giant China Evergrande Group delisted from the Hong Kong stock exchange — making the shares effectively worthless — marking a grim milestone for the nation’s property sector.

China is now considering further measures to revive its struggling property sector, particularly after new and resale homes recorded their steepest price declines in at least a year in October. The slump has heightened concerns that further weakening could destabilize the country’s financial system.

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Evergrande’s downfall is by far the biggest in a crisis that dragged down China’s economic growth and led to a record number of distressed builders. Founded in 1996 by Hui Ka Yan, Evergrande’s rapid expansion was from the outset fueled by heavy borrowing. It became the most indebted borrower among its peers, with total liabilities reaching about $360 billion at the end of 2021. For a time it was the country’s biggest developer by contracted sales and was worth more than $50 billion in 2017 at its peak. Founder and chairman Hui became Asia’s second-richest person. Over the years the company also invested in the electric vehicle industry and bought a local football club.

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How did some Chinese developers get into this mess?

In 1998, China created a nationwide housing market after tightly restricting private sales for decades. Back then, only a third of its people lived in towns and cities. That’s risen to two-thirds, with the urban population expanding by 480 million. The exodus from the countryside represented a vast commercial opportunity for construction firms and developers.

Money flooded into real estate as the emerging middle class leapt upon what was one of the few safe investments available, pushing home prices up sixfold over the 15 years ending in 2022. Local and regional authorities, which rely on sales of public land for a chunk of their revenue, encouraged the development boom. At its peak, the sector directly and indirectly accounted for about a quarter of domestic output and almost 80% of household assets. Estimates vary, but counting new and existing homes, plus inventory, the sector was worth about $52 trillion in 2019 — about twice the size of the US real estate market.

The property craze was powered by debt as builders rushed to satisfy expected future demand. The boom encouraged speculative buying, with new homes pre-sold by developers who turned increasingly to foreign investors for funds. Opaque liabilities made it hard to assess credit risks. The speculation led to astronomical prices, with homes in boom cities such as Shenzhen becoming less affordable relative to local incomes than those in London or New York. In response, the government moved in 2020 to reduce the risk of a bubble and temper the inequality that unaffordable housing can create.

Anxious to rein in the industry’s debts and fearful that serial defaults could ravage China’s financial system, officials began to squeeze new financing for developers and asked banks to slow the pace of mortgage lending. The government imposed stringent rules on debt ratios and cash holdings for developers that were called the “three red lines” by state-run media. The measures sparked a cash crunch for developers that was exacerbated by the impact of aggressive measures to contain Covid-19, such as the suspension of construction sites.

Many developers were unable to adhere to the new rules as their finances were already stretched. In 2021, Evergrande defaulted on more than $300 billion, triggering the beginning of China’s property crisis. Two more property giants defaulted — Sunac China Holdings Ltd in 2022 and Country Garden Holdings Co. in 2023.

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With household debt at a high of 145% of disposable income per capita at the end of 2023, homeowners are increasingly under financial pressure. The country’s residential mortgage delinquency ratio – which tracks overdue mortgage payments – jumped to the highest in four years as of late 2023. Some homeowners are being forced to sell their properties at a discounted rate, which is only exacerbating the problem.

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Chinese banks’ bad debt — loans they no longer expect to recover — hit a record 3.5 trillion yuan ($492 billion) at the end of September. Fitch Ratings has warned the situation could deteriorate further in 2026 as households struggle to repay mortgages and other loans.

A prolonged property slump could also deepen deflationary pressures. Former finance minister Lou Jiwei recently warned that households’ worsening outlook — driven by falling home values — will affect consumption levels and intensify price declines.

According to economists at Morgan Stanley and Beijing-based think tank CF40, the property sector’s drag on inflation could even be greater than official data suggest. They argue that the methodology used to determine China’s official Consumer Price Index understates falling rents, and, by extension, the broader deflationary impact.