Real estate in China

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Real estate in China is developed and managed by public, private, and state-owned red chip enterprises.

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In the years leading up to the 2008 financial crisis, the real estate sector in China was growing so rapidly that the government implemented a series of policies—including raising the required down payment for some property purchases, and five 2007 interest rate increases—due to concerns of overheating. But after the crisis hit, these policies were quickly eliminated, and in some cases tightened. Beijing also launched a massive stimulus package to boost growth, and much of the stimulus eventually flowed into the property market and drove prices up, resulting in investors increasingly looking abroad. [1] By late 2014, the IMF warned that a real estate oversupply problem had arisen that threatened to cause detrimental effects to the Chinese economy, particularly in 2nd and 3rd tier cities. [2] As of 2015, the market was experiencing low growth and the central government had eased [3] prior measures to tighten interest rates, increase deposits and impose restrictions. [4] By early 2016, the Chinese government introduced a series of measures to increase property purchases, including lower taxes on home sales, limiting land sales for new development projects, and the third in a series of mortgage down payment reductions. [5]

Background

With the exception of rural land (which is owned collectively by rural villagers) land in China is state-owned. [6] : 165  The state leases the right to use land for periods of time which vary based on use: industrial land can be leased for 30 years, commercial land for 40 years, and residential land for 70 years. [6] : 165 

Traditionally, the right to use industrial land was sold at a discount while commercial and residential real estate prices were determined by the market. [6] : 165 

As of 2023, China has the highest rate of home ownership in the world. [6] : 170  90% of urban households own their home. [6] : 170 

History

As of 2010, China's real estate market is the largest in the world. [7] [8] According to Bloomberg Economics estimates, the sector contributed to about 20% of China's GDP in 2023, [9] down from a peak of 24% in 2018. [10]

As of 2023, real property accounts for 60% of Chinese household assets. [6] : 161 

Property bubble, 2005–2011

An empty corridor in the mostly vacant New South China Mall, 2010 NewSouthChinaMall-DownEmptyHall.JPG
An empty corridor in the mostly vacant New South China Mall, 2010

The Chinese property bubble was a real estate bubble in residential and/or commercial real estate in China. The phenomenon has seen average housing prices in the country triple from 2005 to 2009, possibly driven by both government policies and Chinese cultural attitudes. [11] [12]

The growth of the housing bubble ended in late 2011 when housing prices began to fall, [13] [14] following policies responding to complaints that members of the middle-class were unable to afford homes in large cities. [14] The deflation of the property bubble is seen as one of the primary causes for China's declining economic growth in 2012. [14]

2011 estimates by property analysts state that there are some 64 million empty properties and apartments in China and that housing development in China is massively oversupplied and overvalued, and is a bubble waiting to burst with serious consequences in the future. [15] The BBC cites Ordos in Inner Mongolia as the largest ghost town in China, full of empty shopping malls and apartment complexes. [16] A large, and largely uninhabited, urban real estate development has been constructed 25 km from Dongsheng District in the Kangbashi New Area. Intended to house a million people, it remains largely uninhabited. [17] [18] Intended to have 300,000 residents by 2010, government figures stated it had 28,000. [19] In Beijing residential rent prices rose 32% between 2001 and 2003; the overall inflation rate in China was 16% over the same period (Huang, 2003). To avoid sinking into the economic downturn, in 2008, the Chinese government immediately altered China's monetary policy from a conservative stance to a progressive attitude by means of suddenly increasing the money supply and largely relaxing credit conditions. Under such circumstances, the main concern is whether this expansionary monetary policy has acted to simulate the property bubble (Chiang, 2016). Land supply has a significant impact on house price fluctuations while demand factors such as user costs, income and residential mortgage loan have greater influences.

In 2011, China's central government encouraged local governments to limit the purchases of new apartments. [20] : 108 

International investment

Chinese consumers have become one of the biggest groups of investors in cross-border property. In the US, Chinese buyers invested $28.6 billion into the residential real estate in 2015, more than any other country. [21] In Australia, Chinese buyers were approved for AU$32 billion of commercial and residential real estate investment in 2015–16, the most of any country. [22] Other estimates put Chinese international real estate investment at $33 billion in commercial and residential property in 2016, up 53% from 2015. [23] Sue Jong, Chief Operating Officer of Juwai.com, a subsidiary of Juwai IQI said most Chinese buyers are "the average Chinese mom and pop looking to invest overseas. The large portion is the middle to upper middle class, that's interested in a good stable investment and may be thinking about emigrating or sending their kids to school there." [24]

Welfare housing system, parallel dynamics, and allegations of corruption

As of 2010, China has officially ordered an end to its welfare housing system; however, according to China Youth Daily , a parallel housing market continues to exist. [25] [26] Government agencies continue to pay less than 20% of market value for real estate, and many officials purportedly misappropriate renovation and housing reform funds for personal gain. [27] [28]

Crisis after 2020

House prices in China's major cities in five years (2017-2021).jpg

In an effort to curb the highly leveraged real estate sector and reduce housing prices for citizens, the Chinese government adopted a Three red lines rule in 2020 to regulate the debt taken on by developers and limit their borrowing based on the following ratios: debt to cash, debt to equity, and debt to total assets. [29] The adoption of stricter regulations triggered turmoil in the Chinese real estate market and led to bond defaults by developers and in some cases bankruptcy filings. Troubled developers include Evergrande, Shimao Group, [30] Country Garden [31] and others. As of Sep. 2023 34 of the top 50 developers have defaulted on their debt. [32] Although the impact to the overall economy has been claimed to be limited, shareholders of the affected property companies have been wiped out, [33] [34] bondholders have been nearly wiped out, [35] loans to these companies through wealth management products are similarly in trouble, [36] many vendors, subcontractors and workers have not been paid for their services, [37] [38] while many Chinese who have purchased properties from these companies are increasingly at risk of not receiving anything. [39] With up to 70% of Chinese wealth invested into real estate, a drop in real estate prices will make Chinese poorer and the resulting negative wealth effect will cause a contraction in consumption. [40] [41] In addition land sales to developers had accounted for about 40% of income for Chinese local governments but reduced building activity by developers has caused a drop in that income. While official numbers show a small decline in that revenue [42] the size of the drop is contested due to local governments propping up the numbers by buying up their own land, and much evident severe funding issues at many of the local governments. [43] [44]

See also

Related Research Articles

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<span class="mw-page-title-main">2000s United States housing bubble</span> Economic bubble

The 2000s United States housing bubble or house price boom or 2000shousing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a real estate bubble, it was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2011. On December 30, 2008, the Case–Shiller home price index reported the largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.

A real-estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets, and it typically follows a land boom. A land boom is a rapid increase in the market price of real property such as housing until they reach unsustainable levels and then declines. This period, during the run-up to the crash, is also known as froth. The questions of whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomic significance, are answered differently by schools of economic thought, as detailed below.

<span class="mw-page-title-main">Irish property bubble</span> Irish mid 2000s asset price bubble

The Irish property bubble was the speculative excess element of a long-term price increase of real estate in the Republic of Ireland from the early 2000s to 2007, a period known as the later part of the Celtic Tiger. In 2006, the prices peaked at the top of the bubble, with a combination of increased speculative construction and rapidly rising prices; in 2007 the prices first stabilised and then started to fall until 2010 following the shock effect of the Great Recession. By the second quarter of 2010, house prices in Ireland had fallen by 35% compared with the second quarter of 2007, and the number of housing loans approved fell by 73%.

<span class="mw-page-title-main">Japanese asset price bubble</span> Economic bubble in Japan from 1986 to 1991

The Japanese asset price bubble was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. In early 1992, this price bubble burst and Japan's economy stagnated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices were closely associated with excessive monetary easing policy at the time. Through the creation of economic policies that cultivated the marketability of assets, eased the access to credit, and encouraged speculation, the Japanese government started a prolonged and exacerbated Japanese asset price bubble.

<span class="mw-page-title-main">Spanish property bubble</span>

The Spanish property bubble is the collapsed overshooting part of a long-term price increase of Spanish real estate prices. This long-term price increase has happened in various stages from 1985 up to 2008. The housing bubble can be clearly divided in three periods: 1985–1991, in which the price nearly tripled; 1992–1996, in which the price remained somewhat stable; and 1996–2008, in which prices grew astonishingly again. Coinciding with the financial crisis of 2007–08, prices began to fall. In 2013, Raj Badiani, an economist at IHS Global Insight in London, estimated that the value of residential real estate has dropped more than 30 percent since 2007 and that house prices would fall at least 50 percent from the peak by 2015. Alcidi and Gros note; “If construction were to continue at the still relatively high rate of today, the process of absorption of the bubble would take more than 30 years”.

<span class="mw-page-title-main">Real estate investing</span> Buying and selling real estate for profit

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<span class="mw-page-title-main">Subprime mortgage crisis</span> 2007 mortgage crisis in the United States

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<span class="mw-page-title-main">Evergrande Group</span> Chinese property development company

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<span class="mw-page-title-main">Australian property market</span> Overview of Australian property market

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<span class="mw-page-title-main">Australian property bubble</span>

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<span class="mw-page-title-main">Chinese property bubble (2005–2011)</span>

The 2005 Chinese property bubble was a real estate bubble in residential and commercial real estate in China. The New York Times reported that the bubble started to deflate in 2011, while observing increased complaints that members of the middle-class were unable to afford homes in large cities. The deflation of the property bubble is seen as one of the primary causes for China's declining economic growth in 2013.

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<span class="mw-page-title-main">Chinese property sector crisis (2020–present)</span> Financial crisis

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References

  1. ↑ Strub, Doug (4 December 2015). "Buying a Slice of Security: Chinese investors look to US real estate for stability, but must work within strict legal barriers". Business Now.
  2. ↑ "Real Estate Oversupply Becoming Bigger Problem For China". Forbes. Retrieved 22 February 2016.
  3. ↑ Neil Gough (11 June 2015). "Idle Home Builders Hold China's Economy Back". The New York Times. By some economists' estimates, real estate and related industries account for more than 20 percent of China's gross domestic product
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  5. ↑ "China Lowers Taxes, Blocks Land Sales in Attempt to Boost Housing Markets". Mingtiandi. 22 February 2016. Retrieved 22 February 2016.
  6. 1 2 3 4 5 6 Jin, Keyu (2023). The New China Playbook: Beyond Socialism and Capitalism. New York: Viking. ISBN   978-1-9848-7828-1.
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  9. ↑ "China's Real Estate Meltdown Is Battering Middle Class Wealth". Bloomberg News . 18 December 2023. Retrieved 18 December 2023.
  10. ↑ Hancock, Tom (28 December 2023). "Goldman, Morgan Stanley Expect China's Housing Slump to Persist". Bloomberg News . Retrieved 1 February 2024.
  11. ↑ Chovanec, Patrick (8 June 2009). "China's Real Estate Riddle". Far East Economic Review. Retrieved 13 March 2010.
  12. ↑ Medium (4 January 2015). "Shanghai Real Estate Trends 2015". Medium Inc. Retrieved 6 January 2015.
  13. ↑ Bradsher, Keith (10 June 2012). "Selling Abroad, China Eases Slump at Home". The New York Times . Retrieved 11 June 2012. the popping of China's real estate bubble over the past year depressed demand for steel, cement and other materials
  14. 1 2 3 Bradsher, Keith (9 June 2012). "Affirming Slowdown, China Reports Second Month of Scant Economic Growth". The New York Times . Retrieved 11 June 2012. China's leaders deliberately popped a real estate bubble last summer because of concerns that middle-class families had been priced out of homeownership in many cities
  15. ↑ China's Ghost Cities. Dateline SBS. Archived from the original on 15 December 2021. Retrieved 17 August 2012.
  16. ↑ "Ordos: The biggest ghost town in China". BBC. 17 March 2012. Retrieved 17 August 2012.
  17. ↑ "Ordos, China: A Modern Ghost Town". Time . 25 March 2010. Archived from the original on 27 March 2010. Retrieved 17 August 2012.
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  21. ↑ "Profile of International Activity in U.S. Residential Real Estate". nar.realtor. National Association of Realtors. Retrieved 11 May 2017.
  22. ↑ Tan, Su-Lin (9 May 2017). "Chinese investment in real estate grows to $32b: FIRB". afr.com. Australian Financial Review. Retrieved 11 May 2017.
  23. ↑ Sheng, Ellen. "Chinese Investment In Overseas Real Estate Hit Record High In 2016". Forbes. Retrieved 11 May 2017.
  24. ↑ Vaswani, Karishma (28 April 2017). "Brexit not deterring Asian investors from UK property market". BBC News. Retrieved 11 May 2017.
  25. ↑ Bishop, Bill (30 April 2010). "China State Media on Corruption And Cooling Off The Real Estate Market". Sinocism. Archived from the original on 31 August 2010. Retrieved 3 May 2010.
  26. ↑ Custer, Charlie (29 April 2010). "State Media Blames Housing Crisis on Corrupt Government". ChinaGeeks. Archived from the original on 3 September 2014. Retrieved 3 September 2014.{{cite web}}: CS1 maint: bot: original URL status unknown (link)
  27. ↑ Bishop, Bill (2 May 2010). "Corruption in Chinese Real Estate". Sinocism. Forbes . Retrieved 3 May 2010.
  28. ↑ Yuhang, Xie (2 April 2010). 解百姓住房难必先除权力自肥. China Youth Daily (in Chinese). Retrieved 3 May 2010.
  29. ↑ Hale, Thomas; Yu, Sun (10 November 2020). "China economy: will hot property market threaten post-pandemic rebound?". Financial Times. Retrieved 19 August 2023.
  30. ↑ "Chinese Developer Shimao Fails to Pay $1 Billion Dollar Bond". Bloomberg.com. 3 July 2022. Retrieved 2 February 2024.
  31. ↑ "Country Garden's Missed Bond Payment Triggers CDS Payout". Bloomberg.com. 26 October 2023. Retrieved 2 February 2024.
  32. ↑ Wilkins, Joseph. "Despite Country Garden's last-gasp payment, China's property sector remains in crisis: two-thirds of its developers with most offshore debt are defaulters". Markets Insider. Retrieved 2 February 2024.
  33. ↑ Farrer, Martin (25 September 2022). "A Ponzi scheme by any other name: the bursting of China's property bubble". The Guardian. ISSN   0261-3077 . Retrieved 19 August 2023.
  34. ↑ Power, John. "As China's property crisis grows, is the global economy at risk?". www.aljazeera.com. Retrieved 19 August 2023.
  35. ↑ Wilkins, Joseph. "Despite Country Garden's last-gasp payment, China's property sector remains in crisis: two-thirds of its developers with most offshore debt are defaulters". Markets Insider. Retrieved 2 February 2024.
  36. ↑ He, Laura (18 September 2023). "Evergrande's woes deepen after police detain staff at its shadow bank". CNN . Retrieved 2 February 2024.
  37. ↑ "Evergrande: default alarms put thousands of suppliers, jobs and economy at risk". South China Morning Post. 9 October 2021. Retrieved 2 February 2024.
  38. ↑ Farrer, Martin (31 December 2021). "Evergrande: 'Everyone bet on inexorably rising Chinese property prices'". The Guardian. ISSN   0261-3077 . Retrieved 2 February 2024.
  39. ↑ "China's mortgage boycott: Could the property market crumble?". Al Jazeera. Retrieved 2 February 2024.
  40. ↑ "China Property Crisis in Charts: Spillover Spreads Across Economy". Bloomberg.com. 21 December 2023. Retrieved 2 February 2024.
  41. ↑ "China's middle class battered by real-estate meltdown—and it might be just 'the beginning of more wealth losses'". Fortune. Retrieved 2 February 2024.
  42. ↑ https://www.cato.org/blog/anatomy-chinas-housing-crisis-ending-financial-repression local government revenue from land sales has gone from more than 40 percent prior to 2021 to 37 percent in 2022
  43. ↑ Ezrati, Milton. "Property Problems Fester In China, Threatening The Whole Economy". Forbes. Retrieved 2 February 2024.
  44. ↑ "China's local government financing vehicles go on land-buying spree". www.ft.com. Retrieved 2 February 2024.

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