World’s Largest Real Estate Market On The Brink Of Collapse: Experts

The latest data released by the central bank of China reveals a significant decline in the eagerness of prospective home buyers.

Despite implementing price reductions and offering incentives, the housing market, which holds the distinction of being the largest globally, continues to experience a substantial downturn. This unfortunate situation has taken a toll on China’s banking sector in two distinct ways, with an increase in both defaults and prepayments. In the midst of these challenging circumstances, prominent real estate conglomerate Wanda Group has recently grabbed attention as the value of its dollar bonds has sharply plummeted.

In the early months of 2023, the Chinese real estate market witnessed a brief resurgence, attributed to the issuance of bailout policies by local governments nationwide, as reported by the China Index Academy, a reputable real estate research institute. Notably, by the end of April, the mortgage rates for first-home buyers in over 40 cities had been reduced to below 4 percent.

However, despite the optimistic outlook in March, the sales figures for April failed to meet analysts’ expectations. The April 2023 Financial Statistics Report, published by China’s central bank on May 11, revealed a decrease of 241.1 billion yuan ($33.8 billion) in mortgage loans during April. Within this figure, medium- and long-term household loans, primarily comprising mortgages, decreased by 115.6 billion yuan ($16.2 billion), while short-term mortgages saw a decline of 125.5 billion yuan ($17.6 billion).

Publicly available statistics indicate that the sales of pre-owned homes in China’s major cities experienced double-digit declines across the board in April. Specifically, Beijing witnessed a substantial drop of 37.3 percent, Hangzhou fell by 32.7 percent, Shanghai declined by 26.71 percent, and Nanjing experienced a 13 percent decrease. Notably, the most severe decline occurred in Hefei, which plunged by 40 percent.

CCP Puts the Brakes on Price Cuts

Due to the sluggish state of the housing market, developers have resorted to reducing prices. However, Chinese regulators took punitive measures against two real estate developers in Kunshan, China, accusing them of slashing prices by an excessively large margin. These actions, according to the regulators, were deemed to have “disrupted the normal order of the real estate market and caused social instability.”

Qu Kai, a commentator on current affairs based in Japan, shared insights with The Epoch Times on May 13, stating that the reason behind the Chinese regime’s reluctance to allow real estate developers to lower prices is quite straightforward. Qu explained that such price cuts would trigger a chain reaction, leading to the immediate bursting of China’s property market bubble. This, in turn, would give rise to a series of economic crises that would pose significant challenges for the CCP to handle.

Qu further opined that the ongoing real estate crisis will inevitably impact banks in due course and eventually have repercussions on the regime as a whole. As the CCP struggles to maintain its revenue through the property market, it will face mounting difficulties in sustaining its financial stability.

On the Brink

China holds the distinction of being the world’s largest housing market, as per estimates provided in economist Ren Zeping’s “China Housing Market Value Report 2021.” In 2020, the value of China’s housing market was estimated at $62.6 trillion, surpassing the figures of $33.6 trillion in the United States, $10.8 trillion in Japan, and $31.5 trillion in the combined markets of the United Kingdom, France, and Germany. Ren Zeping, a former economist at China’s Development Research Center, compiled these estimates.

According to Ren’s “China Wealth Report 2022,” the market value of China’s housing market reached 476 trillion yuan (approximately $73.8 trillion) in 2021. This represents a significant 17.9 percent increase in total market value compared to the previous year, 2020.

When analyzing the ratio of housing market value to GDP, China’s housing market value in 2020 already stood at 414 percent, surpassing Japan’s 391 percent prior to the burst of its housing bubble in the 1990s.

As China’s economy experiences a slowdown and the housing market undergoes a contraction, the number of foreclosed homes in China escalated to 606,000 in 2022, marking a year-on-year increase of 35.7 percent. Concurrently, numerous cities have witnessed a substantial surge in the number of second-hand real estate listings available for sale.

Risk Will Be Passed to Banks

Fang Qi, an experienced finance professional from China currently residing in the UK, conveyed to The Epoch Times on May 13 the potential ramifications of real estate declines and residential mortgage defaults, particularly for banks.

Fang highlighted two risks associated with residential mortgages that can result in losses for banks and weaken their assets.

  • The first risk arises when homeowners default on mortgage payments. One contributing factor to the increasing defaults in China is the ongoing mortgage boycott, where numerous homeowners refuse to make payments for unfinished homes. An article published by The New York Times in August 2022 estimated that the boycott could impact up to 4 percent of outstanding mortgages.
  • The second risk is associated with homeowners paying off their mortgages prematurely, a trend observed among many Chinese homeowners burdened with higher interest rates. These mortgage holders are utilizing personal savings or taking advantage of stimulus programs intended for significant consumer purchases or business ventures.

Analysts have estimated that since early 2022, approximately $700 billion of mortgages—close to one-eighth of China’s outstanding total—have been prepaid, following the banks’ reduction of borrowing rates. In normal circumstances, this would free up cash for banks to fund other loans. However, in the current cautious consumer spending climate, this development proves to be unfavourable for banks. Not only do they experience losses on existing mortgages, but there is also a scarcity of new loans available for financing.

Fang cautioned that this tightening of financing for real estate companies by banks could lead to further turmoil, creating a detrimental cycle that negatively impacts banks’ asset quality and profitability. If the risk continues to spread extensively, banks may accumulate a significant amount of bad debts, potentially leading to bankruptcy.

Real Estate Developers Feel the Strain

Amidst the ongoing downturn in China’s housing market, numerous real estate developers find themselves in a state of turmoil. KWG Property, a prominent Chinese real estate giant, announced on April 28 that it had failed to make a principal payment of 212 million yuan ($31 million) on the due date, triggering a demand for an additional 31.2 billion yuan (approximately $4.36 billion) in debt. Two weeks later, the developer defaulted on a $119 million redemption payment.

Even Wanda Group, a longstanding and significant player in China’s real estate sector, is rumoured to be facing the risk of a debt crisis. Yields on two U.S. dollar bonds issued by Wanda Properties Global, a subsidiary of Wanda Group, surged above 35 percent in April. Market analysts interpret this surge as an indication that borrowers are encountering difficulties in raising new funds, exacerbating the risk of a debt crisis and potential defaults.

In late April, Fitch Ratings placed Wanda Commercial and Wanda Commercial Properties (Hong Kong) on its negative watch list, highlighting the growing concerns surrounding these entities.

Further adding to the distress, Wanda Commercial recently made headlines with troubling news as a $400 million dollar bond, due for repayment in July, experienced a sharp decline to around 70 cents, indicating its proximity to distressed territory. Bloomberg’s article titled “Real Estate Distress Deepens Again as China Woes Spread” shed light on this concerning development.

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