In mid-2021, Evergrande, the largest real estate development company in China, had liabilities exceeding $300 billion and failed to make interest payments to both domestic and international bondholders. The fall of Evergrande hints at the downfall of the real estate industry in China, as well as the ups and downs of industries including banking, construction, architecture, and design companies.
The issues with Evergrande reveal that there are many problems with China’s real estate market. One of the major reasons is that Chinese regulators cracked down on the reckless borrowing habits of developers. A three-red line policy was introduced in August 2020 which aims to regulate the debt-to-cash ratio of real estate firms. The policy states that property should adhere to the following rules:
- Liabilities should not exceed 70% of the assets.
- Net debt should not be greater than 100% of equity.
- Money reserves must be at least 100% of short-term debt.
This set up a framework to deleverage the real estate industry and reduce companies’ outstanding debt obligations. However, because it was applied on such a large scale, the policies caused the real estate industry to fall into a liquidity crisis. Most property companies in mainland China had crossed at least one of the “Three Red Lines”. As investors, banks, and financial institutions saw this situation, they became unwilling to buy the stocks of these companies. This furthered the liquidity crisis by making it increasingly difficult for developers to obtain debt and equity financing for their property projects. China’s policies on real estate regulation have been tight in recent years, which triggered the downward trend of the industry and pushed it into a vicious cycle.
The economic problem of real estate developers’ high reliance on debt for growth has led to the overall property crisis in China. One of the major consequences is the left unfinished residential buildings, which leads to the massive mortgage boycott of individuals that purchased the properties at the presale.
Despite high leverage, another method that real estate developers use to gain continuous cash flow is the presale method, selling units when they are still under construction. In 2022, buildings in more than 100 cities across China failed to finish their construction. The Sixth Tone conducted interviews to reveal the life of homeowners holding half-finished properties. The interviewees chose to move into the empty unit inside the residential building with no running water or electricity, only a single solar lamp for illumination, and simple necessary furniture against the wall. This act of moving into the apartment is of desperation and defiance. Yet residents are still grateful for the life that they have. Some believe “although life is rudimentary here, we no longer have to worry about the monthly rent.” Life in the building has been inconvenient but tolerable as many of the homeowners grew up in poverty and are used to coping with poor living conditions. Of course, this strenuous and peculiar lifestyle is not the ultimate solution to their problems. The homeowners remain anxious as the future of the project is uncertain and they need to endure poor living conditions.
After countless years of waiting for the unfinished buildings to be completed, many homeowners with debt for such properties stopped paying their mortgage payments and formed mortgage boycotts both in-person and online. They claim as “construction stops, mortgages stop…” referring to outstanding mortgage payments for unfinished homes.
After the initial mortgage strike, it went viral on social media. Although the government began to censor such content, the influence of the boycott has spread. Collectively, homeowners threatened the government with stopping their mortgage payments unless the properties are finished. According to ANZ research, it estimates that the boycott could affect about $222 billion of home loans, 4% of outstanding mortgages. With widespread demand for all homebuyers to stop paying loans, the protestors achieved much more success. In early August 2022, their voices eventually reached the highest office. President Xi called on local officials to “ensure the completion” of housing projects and state-owned banks are being strong-armed to finance the work. Although censorship helped to silence the protestors and banned document-sharing links, the influence of the spread shows that the Chinese are not afraid to bond together on a national scale when their personal interests are threatened. A coordinated boycott of this scale is unprecedented.
In response to the overall challenges in the real estate market, macroeconomic policies and structural reforms are needed to shift to a more balanced high-quality growth of the overall economy. With the spark of the mortgage boycott, various changes occurred in late 2022 including government policies and collaboration with banks to save the real estate market.
Authorities support the reasonable extension of real estate development loans and trust loans. Specifically, the sixteen measures signed off by the central bank and the main banking regulator require banks to roll over their loans to the property sector, providing builders with more time to complete unfinished projects. The People’s Bank of China is planning to provide 200 billion yuan, equivalent to 28 billion dollars in interest-free loans to commercial banks through the end of March 2023.
Adding to the positive message, the China Securities Regulatory Commission will also support property developers’ reasonable bond financing needs and support mergers and acquisitions in the sector. Such a move aims to continue financing for developers for the remainder of the year. To enhance the financial stimulation, the PBOC and the China Banking and Insurance Regulatory Commission also urged banks to expand their medium and long-term lending, aiming to help policy banks to finance more effectively. The re-lending program should target other sectors including technology innovation, transport, and logistics with a total of 3 trillion yuan.
Meanwhile, as mentioned in the sixteen measures, the government temporarily eased restrictions to allow bank lending to developers with the hope for them to finish their property projects. On the other hand, regulators also encourage banks to negotiate with homebuyers regarding the extension of mortgage repayments.They also emphasized that buyers’ credit scores will be protected, which alleviates the risk of continuous social unrest. Other direct actions are also taking place. On Nov 24th, The Industrial and Commercial Bank of China announced that it had issued lines of credit totaling $91 billion to 12 developers. As China opens up and ends Covid Restrictions at the end of 2022, it gives hope to developers and economists, believing the economy and real estate industry can bounce back with economic stimulus.
The problem in China’s real estate sector is a complicated one. It is the result of policy and economic changes, which did not form in one day. So, resolving and saving the market will take time. Together the economic recovery, financial support, and ease in policies, can hopefully help China’s real estate market rebound and remain a strong-standing industry.
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