China’s Frozen Real Estate is a BIG, BIG Problem

Frozen real estate A frozen real estate market will greatly affect the growth of China’s state run economy. (maltman23/Flickr)
Frozen real estate A frozen real estate market will greatly affect the growth of China’s state run economy. (maltman23/Flickr)

Modern China is not a happy place. Especially if you’re in the real estate market, one of the key components of China’s state run economy.

Since last October, property sales have dropped to the point where the real estate market is being described as frozen. Some might even call it a receding market based on some figures.

Earlier in August, the central government released statistics which reported that compared to the month before, 68 out of 70 big and medium cities had reduced housing prices. Only one city had increased and one city made it even.

There are a number of reasons why China’s housing market is ill and here are two of them:

  1. Banks are tightening up to prevent future bad and uncoverable loans
  2. The ongoing so called anti-corruption movement has cut off some officials and big companies who had previously speculated on housing

As a result of this, local governments have seen a big decline in the income they receive from selling land and collecting tax on property.

Why important?

On the surface it seems that China’s economy is robust but despite what the Chinese Communist Party says, in reality it’s fragile and in a dire position.

The sick bubble that is the real estate market is just one aspect of that but it’s an important one. Real estate plus railway and highway infrastructure projects accounts for more than 50 percent of China’s GDP.

Earlier, home owners were delighted to see the increase of their assets’ value significantly offset the rising prices of consumer goods. The general belief was as long as real estate prices were rising there would be no problem with the economy and that people’s wealth would increase as well. Confidence is now being lost.

Moreover the majority of local fiscal finances rely on real estate revenue such as those derived from land sales and property taxes. Frozen transactions lead to a significant reduction in the finance of local governments.

The local fiscal revenue, however, had already been overwhelmed by heavy debt even before the reduction. If it wasn’t for the central government supporting local coffers, quite a few local governments would not be able to pay wages. However this will not work when it comes to official debt and local fiscal revenue is no longer used to pay off various debts, including bank loans and money owed to various suppliers.

This in fact equals bankruptcy.

To ease this and to try and bring in more capital, local governments have unlocked purchase restrictions on real estate, so as to stimulate the estate market to increase revenue.

Now that consumer restrictions were unlocked, the local governments also requested the banks to increase loans for real estate but this was ignored. With little revenue coming in from land sales and property taxes, local governments became increasingly desperate.

How things fare for the future remains to be seen.

Real estate tycoons

Now let’s go back a bit. At the end of the 20th century, the communist led regime in Beijing used real estate as a pillar of industry and used it to gather more funds for itself through property development.

During this time, Hong Kong real estate agents, represented by Li Ka-shing, went into the mainland market and began to buy up land on a large scale. Large development projects followed.

With China joining the WTO and increasing its exports, many private enterprises made large profits. Such groups as Wenzhou housing speculation group and the real estate speculation Shanxi Colliery appeared.

More foreign investment went into China. These funds and bank loans together became the main capital in the housing market, and attracted other investors including estate speculation groups to the market.

Allured by the preferential policy of “if you lose money, the government will put in money to make sure it would not fail”, foreign capital poured into China. In the past few years, this is a trend that has changed.

Since 2012, the representatives of China’s real estate investors, Wang Shi, Pan Shiyi and others realized the danger of China’s housing market and they transferred their funds.

Li Ka-shing and other Hong Kong investors also began to withdraw from the market.

In some big cities, people owning multiple houses realized something was wrong with the situation, and planned to sell them at market prices. However, only when they tried to sell their houses did they find that there were no buyers in a market infected with glut.

Banks had by this time stopped offering secondary mortgages and most buyers need commercial loans (whose down payment and interest are high). In many areas now, buyers of second-hand houses even need to pay the full amount up front which further prevents transactions from being completed.

So now China’s important real estate market is falling apart and it’s no small thing for the overall economy. The nature of China’s economy is one that is totalitarian. It is controlled by a central system and it’s supported by local government. It’s followed and practiced by companies, the self employed and foreign investors (including citizens and foreign funds).

With the differentiation of interests, the goals of each interest group have overtime gradually differentiated too. As long as a significant economic change occurs, they will begin to pursue their own benefits and further scatter in different directions and further weaken the economy.

This foreshadows a worrying situation that is China’s economy.

 

Chinese edited by Monica from SecretChina, translated by Billy and Lulu. 

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