The Evergrande Crisis illuminates China’s millions of empty houses

The ailing Chinese real estate company has been making headlines for weeks while investors wait to see what will happen to its enormous mountain of debt. In the course of the slowly developing crisis, analysts point to a deeper problem: China’s real estate market is cooling down after years of oversupply.
The warning signs have been flashing for some time. Before the Evergrande meltdown, tens of millions of homes across the country were considered empty. In the past few years the problem has only gotten worse.

Mark Williams, chief Asian economist at Capital Economics, estimates that China still has about 30 million unsold properties that could house 80 million people. That is almost the entire population of Germany.

In addition, about 100 million properties have likely been bought but not moved into, which Capital Economics estimates could house about 260 million people. Such projects have been followed critically for years and are even referred to as China’s “ghost towns”.

Here’s a look at some of these projects and how the problem first came about.

Real estate and related sectors are a large part of the Chinese economy, accounting for up to 30% of GDP. The share of economic output in the construction industry and related activities is “far higher than in other large economies,” said Williams.

This has given the country rapid economic growth for decades.

For years, however, critics have questioned whether this growth engine created a ticking time bomb for the world’s second largest economy. That’s in part because of the massive debt many developers have taken on to fund their projects.

5 Things You Should Know About Evergrande Crisis: A Simple Breakdown

As China’s most indebted developer, Evergrande has become the figurehead of unsustainable growth, with liabilities exceeding $ 300 billion.

“Evergrande isn’t the only one having problems, however,” noted Christina Zhu, an economist at Moody’s Analytics. In the past few days, a number of other developers have been exposing their own cash flow issues, asking lenders for more time to repay or warning of possible defaults.

In a recent report, Zhu wrote that 12 Chinese real estate firms defaulted on bond payments totaling about 19.2 billion yuan (nearly $ 3 billion) in the first half of the year.

“This represented nearly 20% of total corporate bond defaults in the first six months of the year, the highest in any sector,” she added.

CNN’s Andrew Stevens was walking down an empty freeway during rush hour in Shenfu, one of China’s so-called “ghost towns” in 2016.

The pandemic temporarily halted activity. But construction later came back to life when China reopened and the country’s real estate market saw a brief recovery.

Since then, however, the market has stuttered again. And there is no sign of immediate relief.

In the last few months “measures of price growth, housing construction” [construction] Starts and sales “declined significantly, Zhu noted. In August, real estate sales, based on the area sold, declined by 18% compared to the same period last year, she added.

In the same month, new home prices rose 3.5% “year over year, the lowest growth since the property market recovered from the effects of the June 2020 pandemic,” Zhu wrote.

Listings of apartments for sale at a real estate office in Shanghai, China on Monday, August 30th, 2021.

“The demand for residential property in China is entering an era of continued decline,” Williams wrote in a research note. He called this “the root of Evergrande’s problems – and those of other heavily indebted developers.”

There is also the problem of unfinished projects, even when there is demand. The majority of new properties in China – around 90% – are being sold before completion, which means setbacks for home builders could directly impact buyers, according to economists.

Chinese homebuyers look at residential models of a residential real estate project in Huai City, Jiangsu Province, China on December 23, 2018.

“[This] gives authorities a strong incentive to ensure ongoing projects continue while failing developers are restructured, “said Williams.

According to a recent analysis by Bank of America, Evergrande has sold 200,000 residential units that have not yet been handed over to buyers. This has heightened fears that homebuyers could miss out on the country’s second largest developer.
Residential buildings under construction in Evergrande Cultural Tourism City, a project developed by Evergrande Group in Suzhou, Jiangsu Province, China on September 23, 2021.
In recent weeks, the government has focused on limiting the impact of the crisis and protecting ordinary people. In a statement late last month, the People’s Bank of China pledged to “maintain the healthy development of the real estate market and uphold the legitimate rights and interests of housing consumers.”

The central bank may not have made specific reference to Evergrande, but recently the central bank has been pumping cash into the financial system to stabilize the situation and calm nerves.

A view of the skyline of office buildings at dusk in Tianjin, China.

To be clear, not all businesses are in dire straits. While some players are clearly struggling, “most developers are not on the verge of default,” says Julian Evans-Pritchard, a senior China economist at Capital Economics.

“With a few exceptions, most large developers are in a much stronger financial position than Evergrande and should be able to cope with temporary increases in their borrowing costs due to contagion,” he said in a statement to clients. This should, at least in the short term, calm things down “amid the current market fluctuations,” he added.

But in the long run it may matter little.

“Successfully managing the structural decline in housing demand over the next decade will prove more difficult,” wrote Evans-Pritchard. “A protracted consolidation in the industry over many years seems more likely than an impending wave of developer failures.”

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