China’s Real Estate Crisis ‘Has Not Touched Bottom’

The forced liquidation of China Evergrande epitomizes the sector’s struggles: Nationwide, sales are down and millions of homes have been paid for but not delivered.

An Evergrande showroom in 2021. By one estimate, China has 20 million apartments that have been paid for but not delivered. 
The unwavering belief of Chinese home buyers that real estate was a can’t-lose investment propelled the country’s property sector to become the backbone of its economy.
But over the last two years, as firms crumbled under the weight of massive debts and sales of new homes plunged, Chinese consumers have demonstrated an equally unshakable belief: Real estate has become a losing investment.
This sharp loss of faith in property, the main store of wealth for many Chinese families, is a growing problem for Chinese policymakers who are pulling out all the stops to revive the ailing industry — to very little effect. The troubles of the country’s real estate sector were laid bare on Monday when a Hong Kong court ordered China Evergrande to wind up operations and liquidate the company, which is saddled with over $300 billion in debt.
Like the industry it once ruled, Evergrande limped along for two years after defaulting on payments it owed investors. Evergrande, lacking the cash to pay creditors, tried to exude confidence that its apartments remained a sound investment. The market would surely bounce back, as it had during past downturns.

But the downturn, already the longest on record, is not only dragging on — it is accelerating.
In 2023, China’s housing sales fell 6.5 percent. In December alone, sales were down 17.1 percent from a year earlier, according to Dongxing Securities, a Chinese investment bank. Investment for new projects also slowed. Real estate development fell 9.6 percent last year.
“The market has not touched bottom yet,” said Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis. “There is still a long way to go.”
Last year, even as China’s economy was expected to benefit from pent-up consumer demand after the lifting of pandemic restrictions, the property market weighed on growth. Real estate accounts for roughly one-quarter of China’s economy.
The property sector started to stall after Beijing, worried about a housing bubble and its impact on the financial system, rolled out a series of rules in 2020 aimed at curbing the excessive borrowing of real estate developers. Without easy access to debt, developers struggled to pay off loans and finish building properties that were sold in advance to home buyers.

Nomura Securities, a Japanese financial services firm, estimates that there are still 20 million units of presold homes waiting to be finished, which would require $450 billion in funding to complete.
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A housing development in Hefei last year. A top Chinese official told banks they have “an inescapable responsibility” to help finance the property sector.


Now China has walked back many of those restrictions. Financial regulators are urging banks to lend more to property developers. Last week, Xiao Yuanqi, deputy director of China’s National Financial Regulatory Administration, said the country’s financial institutions had “an inescapable responsibility to provide strong support” to the property sector.
Banks should not immediately cut off loans to troubled projects, but should find ways to support them by extending time to repay the loans or float additional funds, Mr. Xiao added. Last week, China’s central bank and finance regulator said that it would allow some developers to use bank loans for commercial properties to repay other loans or bonds.
Since 2021, more than 50 Chinese property firms have defaulted on debt, including the two firms that once dominated the country’s housing market: Evergrande and Country Garden. Once Evergrande’s main rival for industry leadership, Country Garden effectively defaulted in October. The company’s situation has worsened because its sales have collapsed.
Country Garden said presales of unfinished apartments, an important indicator of future revenue, fell for a ninth straight month in December, to 6.91 billion yuan, or $962 million. That was down 69 percent from a year earlier. In the second half of 2023, presales were down 74 percent from a year earlier.

In a research note this month, Larry Hu, chief China economist for Macquarie Group, said the property slump was “self-fulfilling,” because the debt woes of property developers kept buyers away and pressured home sales, while the dearth of new business only deepened the financial problems of those firms.
“The key thing to watch in 2024 is if and when the central government would step in and take the main responsibility to stop the contagion,” Mr. Hu wrote. He said the Chinese authorities could bail out property developers, similar to how the U.S. government stepped in during the global financial crisis with the Troubled Asset Relief Program, or TARP.
When China moved to cool real estate several years ago, one step it took was to limit speculators from buying homes. Home buyers were required to make large down payments, discouraging people from buying additional properties.
Suzhou, a city in eastern China, lifted most of its home purchase restrictions, removing limits on the number of homes one person could purchase and waiving any residency requirements, state-run media reported on Tuesday.
LIQUIDATION SALEChina Evergrande must be dismantled, a judge ruled. What happens next?

The Shenzhen offices of Evergrande, which once dominated China’s property market. Credit...



But even easing the rules has not helped to lift the market. China’s outstanding mortgage loans fell 1.6 percent last year over 2022, a year when businesses and residents in many cities were still contending with pandemic lockdowns. This, according to the Chinese business magazine Caixin, was the first decline in almost two decades. Mortgages had been growing by more than 10 percent annually until 2021.
A lingering cause for concern for some potential home buyers remains the large quantities of unfinished, presold apartments. For years, home buyers would agree to purchase new apartments and start paying a mortgage years before the units were built. It caused an uproar when some property developers suspended construction on presold apartments because they lacked the funds to pay contractors and builders.
While the government has pushed firms to finish construction on presold apartments, there are still many projects that are not complete.
Nydia Duan, a 19-year-old college student in Zhuhai, in the southern province of Guangdong, said her family offered to buy her a home when she turned 18, but she resisted because she was concerned in part about buying an unfinished apartment.

While housing prices have plummeted in recent years, Ms. Duan said that she was generally pessimistic about the outlook for real estate, and that she preferred to keep her family’s money in cash.
“I’m still reluctant to buy one,” she said. “I’ll consider it when the property market is more stable.”