Want to buy a house in China? Many say don’t. The real estate industry in China is currently in shambles as the fallout from debt-ridden developers and declining sales plague China’s economy.
With examples of bankruptcy and wasted money all across the country in the form of unfinished buildings, ghost towns, and completely empty airports, it makes you wonder where all the government’s money is going amid this crisis. Unsurprisingly, they’ve been paying for public projects like unused airports with debt to help with their unemployment crisis. The government and private companies like to pay with debt because any interest they have to pay back from the person they’re borrowing from is all tax deductible. Now the cracks are finally showing within the Chinese economy after the government and these private companies have used so much debt to pay for things. One major example is major Chinese real estate developer Country Garden, who has stopped paying their interest payments on all the debt they’ve accumulated, which is equivalent to $200 billion dollars, or about ¥29.95 trillion yuan. Country Garden has gone from being the largest real estate developer in China to now having their stock delisted due to major losses and a lack of paying back their debt.
“The entire industry has undergone profound changes, and its gross profit margin has continued to decline,” said Zhu Jiusheng, CEO of another big Chinese residential developer, China Vanke. “The previous method of buying a large amount of land with high leverage…has become unsustainable.”
China stores 70% of its wealth in real estate, forcing investors to reconsider their favorite means of saving. On top of that, 90% of new homes are sold via presale (paying for the home before it’s built), and the price-to-income ratio in popular cities is now 14x (when the U.S.’s ratio is only 7x). With Chinese citizens paying these massive prices to prepay for houses that are no longer being built, many people aren’t paying back loans to banks for their houses. Now the people with homes are cutting spending, postponing marriages, and boycotting mortgages due to the property crisis.
The next step for the average Chinese citizen is to stop investing for a while and keep all of their money in cash, but even that isn’t a smart option. This is because China is currently undergoing a massive devaluation of its currency. Coincidentally, according to CNN, China’s currency has been devaluing ever since Xi Jinping took office. In fact, the entire economy has slowly collapsed since Xi Jinping entered office, influencing the decline of China’s former economic boom through his influence over the Chinese and world economies.
Ken Cheung, chief Asian Forex strategist at Mizuho Bank, said that China’s leadership shuffle has “sparked worries about the continuation of market-unfavorable policies and the increasing risk of policy mistakes under President Xi’s power domination in coming years.”
Overall, China’s real estate market has been seen by many as an increasing flame waiting to be put out. But with little effort from the Chinese government, we’ll have to wait and see how long it’ll take for this crisis to die down.
