Xi Jingping’s regime has taken action to deflate China’s real estate bubble. The bubble was exposed after the restructuring of Evergrande, but despite Xi’s apparent power, the General Secretary of the Chinese Communist Party and China’s head of state faces strong opposition from within the Chinese Communist Party leadership.
China’s real estate bubble is becoming increasingly evident in the face of high debt on the part of both construction companies and Chinese households. In China, up to 90 % of urban households own the homes they live in, and the real estate industry represents one third of China’s gross domestic product.
As much as 80 % of the wealth accumulated by Chinese households is real estate, so a fall in the value of housing in China would effectively make Chinese households poorer.
The Chinese real estate bubble has become larger over time and housing prices are growing at a faster rate. According to financial analyst, Wolf Ritchier, by 2018 87 % of new apartment purchases in China were bought by households who already owned a home.
Ritchier estimates that there are around 108 million apartments under construction in China. Given that 90 % of China’s urban population owns their own homes and the working age population has declined over the last decade, it is difficult for these new homes to have a demand to meet.
The effects of China’s economic reality have already begun to be felt and in September sales of the top 100 real estate developers fell 36 % compared to a year ago.
Over a ten-year period, household debt in China has gone from 18 % of Gross Domestic Product (GDP) to just over 60 %. Property builders and developers in China have also taken on massive debt that equates to as much as $5.2 trillion, a debt that exceeds the size of an economy like Japan.
Like Evergrande, more and more property developers in China are beginning to default on their debt service. This week it was the turn of Modern Land, a Beijing developer that just defaulted on more than $250 million in interest payments. Fantasia Holdings, a real estate developer in Shenzhen missed a payment of more than $206 million.
In September, the debt default of Chinese real estate developers doubled, totaling more than $7 billion. Financial analysts are still debating whether the Chinese government has the tools to control the crisis or whether there will be a cascading effect that will drive thousands of developers into bankruptcy.
Although Xi intends to implement a property tax in China’s 30 major cities, according to The Wall Street Journal there are Communist Party members who disagree with General Secretary Xi’s intentions.
The central bank of China has also limited housing loans and for the month of August these fell by approximately $70 billion. These measures have already been felt in China and September was the first month since February 2020 where housing prices did not rise in China’s top 30 cities.