Why China can’t sort out its property market mess
ONCE one of the country’s biggest growth drivers, China’s property market has been in a downward spiral for five 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 have racked up enormous debt on speculative projects are on the brink of collapse.
There was some optimism that the government’s measures to end the crisis had been working to reinvigorate the market, but on Mar 31, government-linked developer Vanke reported a record 49.5 billion yuan (S$9.1 billion) annual loss for 2024.
It’s the company’s first full-year loss since its initial public offering in 1991, reigniting concerns about the sector and showing just how deep the problem runs.
What has happened to Vanke?
Headquartered in the southern city of Shenzhen and listed on the Shenzhen Stock Exchange since 1991, China Vanke is well-known across the country for building homes in China’s largest cities.
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Ranked China’s fifth largest builder in 2024 with 130,000 employees, Vanke has been facing a wall of debt repayments as its home sales tanked to their lowest level in 10 years. On Jan 27, Vanke forecast a record 45 billion yuan loss for 2024 and its chairman and chief executive resigned.
On Feb 10, Vanke’s largest shareholder, the state-owned subway operator Shenzhen Metro Group, agreed to loan the developer as much as 2.8 billion yuan to help it repay outstanding debt. Xin Jie, the chairman of Shenzhen Metro, became Vanke’s chairman.
On Mar 31, the company posted a US$6.8 billion full-year loss, worse than its January forecast. The result, which suggests a 32 billion yuan loss in the final quarter of 2024, implies operations worsened significantly even as the government unveiled its biggest package yet to revive the market.
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While other developers have defaulted in recent years, many analysts had expected Vanke to be insulated from the downturn because it was not as highly leveraged as its counterparts. It also had government links affording it more financial protection, and it had already managed to survive the crisis for the last four years.
How did Vanke and other 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 per cent of household assets. Estimates vary, but counting new and existing homes, plus inventory, the sector was worth about US$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, China’s largest developer Evergrande Group defaulted on more than US$300 billion, triggering the beginning of China’s property crisis. Two more property giants, Country Garden and Sunac, defaulted in 2022.
How did the crackdown affect the market?
After years of insatiable demand from buyers, the market ground to a halt. In addition to the government’s lending restrictions, the economic shock of Covid-19 lockdowns reinforced a culture of frugality, and a deteriorating job market meant people were suddenly facing layoffs and salary cuts.
Property prices began to fall in 2022.
In August 2024, the country recorded its steepest annual drop in property values in nine years. On top of the millions of square feet of unfinished apartments that indebted developers left to gather dust, the imbalance in supply and demand meant 400 million square metres of newly completed flats remained unsold as of May 2024.
With household debt at a high of 145 per cent 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.
What has the government done to try to prop up the market?
In 2022 authorities realised the rules to rein in the market had gone too far. Aiming to avoid a “Lehman moment” - when the failure of the US bank in 2008 sent shock waves through global markets, the government unveiled measures centered on boosting equity, bond and loan financing for developers to alleviate the liquidity crunch.
Developers were allowed to access more money from apartment pre-sales, the industry’s biggest source of funds, and 200 billion yuan was advanced as special loans to complete stalled housing projects. The government tweaked financial rules, allowing the central bank to increase support for distressed developers and instructing banks to ensure growth in both residential mortgages and loans to developers in some areas.
More recently the government has cut borrowing costs on existing mortgages, relaxed buying curbs in big cities and lowered taxes on home purchases. It also trimmed purchasing costs for people seeking to upgrade dwellings in some big cities. Despite these measures, the property market remains in a rut.
What more is the government willing to do and why?
Government officials clearly don’t want the property crisis to worsen. By limiting the damage done to developers, they aim to stem the bleeding to other vulnerable parts of the economy.
This includes banks with a significant portion of their assets tied to real estate; the construction industry, which employs 51 million people; and local governments, which rely on selling land to developers to sustain their public spending.
This has been one powerful way the government has previously reined in prices, as the passport-like permit regulates population movements by limiting access to housing and medical and education resources in cities.
It is also considering abolishing the distinction between first- and second-home purchases, which would pave the way for smaller down payments and lower mortgage rates on second residences.
The People’s Bank of China is also expected to cut the economy’s main policy interest rate – the seven-day reverse repo – further from 1.5 per cent in 2025. BLOOMBERG
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