China’s Real Estate Crisis
China’s recent real estate crisis has been garnering significant attention. The crisis began with the deteriorating financial health of China’s top two real estate giants, Evergrande and Country Garden.
The downturn in China’s real estate market gained momentum when Evergrande Group faced a bankruptcy crisis in September 2021. Subsequently, Country Garden also faced default risks. While Country Garden has managed to avert its default crisis for now, China’s real estate crisis continues to unfold.
The Crisis at Country Garden
Country Garden has analyzed the reasons behind its crisis as twofold. Firstly, it anticipated a downturn in China’s real estate market, but the downturn persisted longer and had a broader impact than expected. Secondly, it acknowledged that the company had a significant investment focus on third- and fourth-tier cities, smaller towns, and failed to sufficiently reduce its debt ratio. As a result, it issued an apology in the form of a statement, acknowledging a failure in risk management.
The Situation in the Chinese Real Estate Market
In 2022, the investment in China’s real estate development recorded approximately $1.82683011 trillion (13.29 trillion yuan), marking a 10% decrease compared to the previous year. This decline represents the first drop in China’s real estate development investment since it started being tracked in 1999.
The real estate industry had grown to become a core sector of China’s economy. However, it faced this outcome due to an emphasis on expanding its size through debt rather than effective risk management.
In response to the real estate industry’s growing debt crisis, the Chinese government implemented deleveraging measures, including loan regulations, in 2020 to prevent a debt explosion. This led to a liquidity crisis in the real estate sector.
Starting from the previous year, the real estate market experienced a downturn, resulting in declining apartment prices and reduced sales, which in turn led to a decrease in revenue for the real estate industry.
As a result, China’s real estate sector has been struggling due to difficulties in raising funds under government regulations and a sharp drop in sales volume, leading to default and bankruptcy crises.
Chinese Government’s Superintensive Measures
The Chinese government has been rolling out a series of policies aimed at easing real estate regulations in an effort to revive the faltering property market, a move interpreted as an attempt to bolster the Chinese economy.
In late August 2023, the Chinese government announced a package of measures, including a reduction in benchmark interest rates, policies to stimulate the capital market, and the relaxation of real estate regulations.
One significant change involves standardizing the down payment requirements for first-time homebuyers and second-time homebuyers, setting them at 20% and 30% respectively. Prior to this change, the down payment for home purchases, which had to be paid with available funds before obtaining a loan, ranged from 60% to 80%. This means that individuals can now rely more on loans to cover a larger portion of the home purchase.
Locally, these measures are being referred to as the “most powerful move” because nationwide standardization of down payment requirements for first and second-home buyers has only occurred three times, including this year.
On the same day, the Chinese government also issued recommendations for lowering interest rates on mortgage loans for first-time homebuyers. In essence, the Chinese government aims to increase the proportion of loanable funds and reduce the burden of loans to stimulate sentiment and activity in the housing market.