As reported by The Guardian on July 28, Yang Huiyan – Asia’s wealthiest woman and a major shareholder of China’s top property developer Country Garden, has seen her fortune plunge by more than 52% to 11.3 billion dollars over the past year.
Despite losing more than half her net worth, Yan remains the wealthiest woman in Asia.
However, many others, particularly those from the middle class, are not as fortunate as this female billionaire.
Bloomberg shows a debt-trapped homebuyer, Peter, who has given up his dreams, including starting his own business and purchasing a BMW 5 series. This is because China Aoyuan Group in Zhengzhou city, Henan province, suspended the construction of his 2 million-yuan (300,000 dollars) house. He is currently burdened with a mortgage that consumes 90% of his disposable income on a house he might never see.
A technology firm worker, Li, has taken a 25% pay cut this year. He now uses a third of his salary to pay the monthly mortgage of 4,000 yuan (600 dollars) for a halted Evergrande development in Wuhan.
Wang, a 33-year-old homebuyer in Zhengzhou, has been under increasing pressure to repay his mortgage from a housing loan of nearly 2 million yuan (about 296,000 dollars) since 2019. He expects to receive his house by June 30 this year, but he cannot because it is unlikely to finish on time.
Those cases above are just among the hundreds of thousands of homeowners to engage in the nationwide mortgage boycott with a total of 2 trillion yuan (295 billion dollars).
Reasons from homebuyers
The property price bubble in China is attributed to many reasons, some from the homebuyer side.
Sunday Guardian Live reported on July 30 that China’s middle class is estimated to be over 400 million. They hold around 70% of the collective wealth in real estate.
Among them, around 200 million people are in the “new middle class.” They have 4 characteristics. First, they are young, with the post-80s and post-90s as the main force; more than 60% are aged 25 – 40. Second, they are well-educated with a bachelor’s or above degree. Third, they have a decent annual income of more than 100,000 yuan (nearly 15,000 dollars). Besides, they mostly live in tier one and tier two cities in China. Real estate also dominates their wealth structure with 56%.
In Chinese culture, owning a house is one of the top priorities for young men to prove their worth before getting married. Therefore, if a man wants to have a wife and settle down, he has to buy a house to be considered marriage material.
Chen Peng, a musician from Zhengzhou, reveals that his parents gave him some money to buy a property in 2015, hoping to make it easier for him to get married. With the gifted money, his life savings, and several credit cards, he paid 46,000 dollars for the down payment, which was more than 5.5 times the average annual salary at that time in his city. Unfortunately, his long-waited condo was suspended midway. Chen still had to make the mortgage payment without informing his parents.
As reported by SCMP, Eli Mai, a 40-year-old sales manager at a consulting firm in Guangzhou, used to be long held up as the envy of the middle class. During the red-hot property market in 2016, he decided to go all-in to purchase a second apartment. In the past 7 years, he took out several loans with terms ranging from 1.5 to 30 years. He also borrowed money from relatives and friends. Moreover, he used his first apartment purchased in 2011 as loan collateral for the second. The property market crisis has caused his investment to plunge by nearly a fifth.
Although he still owns 2 properties and remains employed, he is buried in debt, shattering his dreams of financial freedom.
Lulu Chen, a Bloomberg journalist reporting on real estate trends in Asia, says in an interview with The Spectator that Chinese youngsters tend to think that life is always going upward and tomorrow is going to be better than yesterday. This kind of mentality exists among people born in the late 70s, especially 80s and 90s.
These generations have never seen that bad crisis and never experienced an entire economic cycle.
What is happening really changes their view of what life will be like in the future. The real estate crisis compounded by the aftermath of the Shanghai lockdown has been a wake-up call for many middle-class residents and an eye-opener for many affluent urban citizens in the world’s second-largest economy.
In fact, many homebuyers know this. As Peter says, “I know every investment comes with a risk, and you pay the price for your own choices. But homeowners aren’t the ones to blames and shouldn’t bear the consequences.”
So who should be to blame?
How do developers roll the “snowball” of the real estate crisis?
Market Place reported that almost all developers in China follow a pre-sale model. It means that developers, especially Evergrande, sell houses before they are built. They would then collect large down payments, from 30% to even 50%, to construct their projects. At the same time, they got cheap loans from banks. Eventually, they started investing in many sectors they had no expertise in. Take Evergrande as an example. The giant has expanded to water bottling and electric cars. It even purchased a soccer team.
As reported by VOA, an economist in China compared the nation’s real estate market to a Ponzi scheme, a sort of fraud in which cash obtained from new investors is used to compensate existing investors.
George Magnus, a senior economic adviser to UBS Investment Bank, says that in a decade, household debt saw a fivefold increase to 10 trillion dollars in 2021, with the ratio of debt to disposable income soaring to 130%.
Developers funded by high investment from borrowing money have created a circle of high sales, high demand, high investment, and high borrowing.
Most properties can be delivered with continuous expansion when the economy is favorable. If the contraction exists, developers will not be able to complete the projects if there is no further funding.
However, when the Chinese central government recognized the property developers’ debt was getting out of control, it adopted tightening policies – “Three Red Lines” in August 2020. They aimed to reduce reckless borrowing by setting thresholds for developers’ liabilities, debt, and cash holdings. After that, Covid-19 spread, and China’s draconian lockdowns contributed to stalling work on residential projects.
When developers run out of money, they don’t pay their suppliers or construction workers. These people, in turn, cannot pay their bills. Layoffs happen. Homebuyers of unfinished buildings rush to join mortgage boycotts. The snowball effect occurs, leading to social and economic chaos in China.
As reported by VOA, Chinese authorities are afraid that those in the middle class with more influence and stronger voice than villagers can get connected through the Internet, turning economic issues into political ones.
What has the Chinese government done to get out of this mess?
The Washington Post describes the property crisis in China as “a mess.” The whole industry has fallen into a deep slump. Combined sales at the top 100 developers halved in the first 4 months of this year and dropped 39.7% in July from the same period last year. July sales plunged 28.6% from June, ending a two-month recovery in month-to-month sales growth. Most developers starved for cash to cover their liabilities. At least 18 defaulted on offshore bonds after the government’s crackdown began. More than 320 projects across 100 cities face mortgage-payment refusals from hundreds of thousands of middle-class Chinese.
The Real Deal reported on July 30 that China has just approved a 44 billion dollar bailout to bolster its real estate industry.
The central bank and China Construction Bank will fund 80 billion yuan (nearly 12 billion dollars) to help distressed developers finish incomplete projects. Government officials have started to censor social media posts about the nationwide mortgage boycott. Besides, housing officials vowed to better oversee developers’ use of funds.
However, experts say that the recuse task is not easy.
Larry Hu, chief China economist at Macquarie told Reuters that “We don’t know details of the fund yet. If just 80 billion it’s not enough to solve the problem. I believe the fund would be part of the bigger package to solve the current debt and mortgage crisis, because it alone would not solve all the problems … we need a real estate recovery.”
Gary Ng, senior economist, Natixis CIB Asia Pacific, says, “In the second half of 2022, there is no hope for a quick rebound in the real estate sector, and it will continue to drag economic growth.”
He adds, “The antidote is to boost the confidence of homebuyers and developers once again, but it has proven to be a difficult task.”
In an interview with The Spectator, George Magnus says that the Chinese government likes to talk about win-win situations. However, this is really a lose-lose. There is no real winner at all.