A strength of policy, lying mostly in a commitment to manage risk within the financial sector and not trade extensively in derivatives, allowed China to escape the 2008 financial crisis. A shocking state of plummeting real-estate prices in the United States of America, the 2008 housing market crash affected almost every country in the world, yet China was able to make its way out of the crisis with not only trivial losses rooted mostly in the decline of exports, but also use it as an opportunity to stimulate domestic demand. However, while this forward-looking mindset of risk mitigation might have helped the nation escape wrath in the early decade of this century, coming out of the current housing crisis that China seems to have ironically gotten itself into, requires much of the opposite too; it requires taking a breath, looking back and learning from the mistakes of its foreign ‘friends.’
Analysts across the globe believe that the real-estate crisis within China, which is nothing but a self-inflicted bubble, may just be the worst that the world has ever seen… and that’s saying something, given that the world has already seen quite a lot with respect to housing market bubbles and their forceful bursting. Representing 29% of the GDP and requiring nearly 9 years worth of disposable income of an average person in terms of prices of individual assets, the housing market in the country peaked in the early half of 2020. This may be attributed to cities like Shanghai and Beijing, with limited land for residential purposes but with a balanced industrial structure and service outlook sufficient enough to attract local purchasers and those from across the country, introducing a land-auction system during the pandemic. Under this system, the party that gives the highest quotation wins the land. Thus, more generally historically, a reason behind this consistent rise in housing prices was a parallel rise in land prices, which was in turn caused by a shortage in available land for residential construction.
It was only in 2021, after the visible peak, that the matter grabbed eyeballs among those in power, which was then followed by President Xi publically stating, “houses are for living in, not for speculation” and “land prices, house prices and public expectation must be stabilised.” Drawing on the 2008 financial crisis, it was evident that self-bursting the bubble was essential, before it expanded so much that it ultimately burst on its own and the mess was too costly for anyone to clean. In other words, it was important to control the prices before they reached a level from where, if they dropped, recovery would have been devastatingly long and painful for the economy. Consequently, a number of supply-side restrictions were imposed. However, despite the well-intentioned efforts, the nation seems to have missed the train for a perfect intervention here, for much to the horror of the authorities, housing prices have started falling incontrollably in the country.
Multiple factors have been contributing to this stark fall. Firstly, with China’s falling economic growth, potential homebuyers are increasingly pessimistic about job security and future earnings. Secondly, with demographic changes such as falling population growth rates and aging population, there has been a natural contraction in demand for new housing, which has led to a gigantic over-supply of these assets in only a few years. Lastly, but most importantly, defaults by major property developers such as Evergrande Group, Country Garden, Kaisa Group and the like, as a result of regulations on their debt limits, has eroded consumer and investor confidence in the sector.
According to the New York times, China has nearly four million apartments that no one wants to buy, a combined expanse of unwanted living space roughly the area of Philadelphia. In response, the government has started indulging in public investment, urging local governments to also invest in unsold properties or take over unfinished projects. Top leaders in the country too have committed $41.5 billion to help fund loans for state-owned companies to start buying unwanted property. However, these companies or governments don’t seem to be interested in buying these unattractive, small city properties. To complicate matters, developers seem to have expanded most aggressively in places with declining population, thus restricting any scope of these complexes being converted into social-housing projects. This has made analysts think if maybe even this initiative has come a little too late. But if there is anything that the 2008 crash has taught the world, it is that such public expenditure is absolutely necessary and probably the only known way forward for China.
Gaurika Bhanot
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