5/24/2024: China is trying to Bail out the Real Estate Market
A week ago, the Chinese government announced a rescue plan to shore up its struggling real estate sector. Housing prices in China have been in free fall since 2022 and the declining housing prices lead to a reverse wealth effect that dampens consumer spending. Chinese property developers like Evergrande and Country Garden were already in financial distress before the steep price decline. But if the housing prices fall further, developers with a stronger balance sheet can also falter. When a property developer fails, it will cause financial distress on its creditors, vendors, and home buyers. Real estate accounts for approximately 25% of China's GDP. It’s a huge percentage so China can’t afford a majority of the property developers going bankrupt. It totally makes sense for the Chinese government to step in to stop the bleeding. But there’s a structural oversupply of housing in China. China only has 1.4B people but has 600M housing units. With a declining population, they don’t really have enough people to occupy those 600M housing units.
The rescue plan lowers the down payment requirements for home buyers and removes the floor for mortgage rates, which was 3.5%. It urges local governments to buy unsold homes(!!). The central bank also provides 300B yuans of funding for state owned corporations to buy unsold homes to convert them into public housing. It is estimated there’s 6-7T yuans of unsold homes in China. It’s unclear if 300B yuans and all the easing on home buying rules is sufficient to spur the demand and stop the bleeding. But the current situation is eerily similar to Japan in the 1990s. There was a lot of speculation on China's property market. Builders overbuilt and many people were buying homes not to live in them but as leveraged investments. Everything was awesome when the real estate prices were going up. But once the prices started falling, no one is interested in *investing* in real estate any more. If there is steady population growth, the real estate market will eventually recover due to demand growth. But like Japan, China is experiencing a population decline. Inevitably a good percentage of the housing units in China will sit empty and I suppose the current solution is to have the governments absorb the excess housing supply. This could potentially work. I believe it’s also generally good to keep housing affordable. It will take a while for China to work out the over leverage and enormous debt load in their financial system. But if they can get through it, it could be a blessing in disguise in the long run.