{"id":144422,"date":"2022-08-26T12:26:01","date_gmt":"2022-08-26T18:26:01","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=144422"},"modified":"2023-08-08T14:50:21","modified_gmt":"2023-08-08T20:50:21","slug":"inside-chinas-real-estate-crisis","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/inside-chinas-real-estate-crisis","title":{"rendered":"Is the Global Economy About to Collapse? Inside China&#8217;s Real Estate Crisis"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC1809935706&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">China is caught in a self-perpetuating housing market downturn. The only way out may be to relieve property developers, whose nefarious practices contributed to distrust in real estate in the first place.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">China\u2019s central bank&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-08-15\/china-central-bank-unexpectedly-cuts-key-rate-to-boost-growth\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cut interest rates<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in August to encourage borrowing, but Covid lockdowns and declining confidence in the market mean the move will have little effect. The Chinese&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-07-28\/china-banks-rush-to-raise-record-debt-as-credit-losses-mount\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">banking system is becoming increasingly fragile<\/span><\/a><span data-preserver-spaces=\"true\">, with about&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2022\/08\/17\/business\/china-economy-real-estate-crisis.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">4% of outstanding mortgages<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;already affected by growing payment boycotts across the country. And&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.reuters.com\/world\/china\/chinas-retail-factory-sectors-unexpectedly-slow-july-2022-08-15\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">slow growth in July<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;shows the crisis is already impacting the nation\u2019s overall economy.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Besides the obvious implication of financial hardship for the Chinese people, why does this matter? China is the world\u2019s second-largest economy.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/ustr.gov\/countries-regions\/china-mongolia-taiwan\/peoples-republic-china\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">18.6% of U.S. imports<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;came from China in 2020, while exports to China totaled $124.5 billion. China is already&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.reuters.com\/markets\/us\/china-cuts-us-treasuries-holdings-7th-straight-month-data-2022-08-15\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">reducing its holdings of U.S. treasuries<\/span><\/a><span data-preserver-spaces=\"true\">, effectively pushing up consumer interest rates in the U.S. If China\u2019s economy collapses, it will have devastating effects on the global economy.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Ingredients in China\u2019s Real Estate Meltdown<\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">A Housing Bubble Created by Government Policy and Cultural Pressures<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">The Chinese property market has been in freefall for nearly a year. In the spring, desperate property firms began accepting garlic, watermelons, and other&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bbc.com\/news\/business-62046282\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">farm produce<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;as funds for a downpayment. But things weren\u2019t always this dire. For six years before the decline, property values grew rapidly. China\u2019s citizens believed real estate was the best way to increase their wealth and spent huge portions of their income on primary homes and investment properties. Government policy and societal pressures supported this behavior.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Most of the problem was created because local governments are incentivized to artificially drive up demand for housing and keep prices high. City governments get&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/newsletters\/2021-10-23\/china-s-real-estate-bubble-started-with-state-capitalism-new-economy-saturday\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">46% of their revenue<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;from land transfer fees. To collect more money, these local governments increased property subsidies, encouraging more home buying. They even manufactured demand by forcing people to sell rural residences and buy more expensive units in urban housing complexes.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But relying on land sales for local revenue isn\u2019t sustainable, especially with the slew of other factors impacting the market. One solution would be raising property taxes to cool the housing market while maintaining funding for local governments, but the idea hasn\u2019t taken hold so far.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Meanwhile, there has been a lot of cultural pressure for citizens to become homeowners, particularly men looking to start a family. About&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-07-19\/china-mortgage-boycott-reveals-housing-uncertainty\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">78% of household wealth<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in China is tied up in real estate, which has long been considered a stable investment. Generally, people save their income for years for the chance to buy a home. For this reason, damping demand may have been challenging, even if local governments were willing to take the loss.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Real Estate Developer Ponzi Schemes<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">In China, real estate developers have adopted the pre-sales model to fund their projects\u2014essentially a Ponzi scheme. Chinese home buyers were willing to buy properties that were not yet built, and some property developers used that money to finish projects they had already sold, allowing them to collect more money from pre-sales. About&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2022\/08\/17\/business\/china-economy-real-estate-crisis.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">90% of real estate was pre-sold<\/span><\/a><span data-preserver-spaces=\"true\">. That strategy would be sustainable with continued demand, but once the housing market slumped, the jig was up.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Ironically, it was in part government policy reacting to the potential risks of the situation that caused companies like&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nytimes.com\/2021\/08\/10\/business\/economy\/china-evergrande-debt-property.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Evergrande<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;to default, leaving Chinese note holders to pay mortgages on unfinished properties. This cast doubt on real estate as a secure investment, causing a steep decline in demand. Now property developers have trouble raising funds to complete those projects\u2014it\u2019s a vicious cycle.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Government Attempts to Control Excess Debt<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">In an attempt to keep the housing bubble from bursting, China implemented the \u201cThree Red Lines Policy,\u201d which established&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/supchina.com\/2022\/06\/13\/chinas-three-red-lines-policy-to-safeguard-the-property-sector-isnt-working-yet\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">three requirements<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for property developers:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Liabilities must account for no more than 70% of assets<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Net debt can\u2019t make up more than 100% of equity<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Must have at least 100% of short-term debt in money reserves<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Almost half of all property developers in China didn\u2019t meet the requirements. That caused land acquisition to slow down and development projects to go unfinished as developers could neither sell the properties under construction nor access financing. By 2020, for example, Evergrande had nearly&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2021\/10\/19\/how-evergrande-found-itself-on-the-wrong-side-of-chinas-regulators.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$200 billion<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in projects under construction, but the company only managed to sell a fraction of the amount that year.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">A Zero Covid Policy That Crippled the Economy<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">President Xi Jinping\u2019s \u201czero Covid policy\u201d prioritizes limiting the spread of Covid over maintaining a stable economy. Strict isolation measures have hurt consumer spending and led to higher unemployment. As an example of the dramatic response, just&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bbc.com\/news\/world-asia-china-62046521\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">a few infections<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in Beijing last month meant that 21 million people were required to get tested every three days to be allowed in corner stores.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As a result of the policy, migrant workers and young people are unemployed in large numbers. Economists view China\u2019s separation from the rest of the world&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.piie.com\/blogs\/realtime-economic-issues-watch\/chinas-zero-covid-policies-are-crippling-its-economic-outlook\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">picking up pace<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;as investors, tourists, international students, and ex-pats lose interest in the country.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Widespread Boycotts of Mortgage Payments for Unfinished Projects<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">For Chinese homeowners, enough is enough. They\u2019re tired of lockdowns and sick of waiting for developers to finish the homes they\u2019re already paying the mortgage on. For many, affordability is also a concern due to the weakening economy. What started with a small group of homeowners boycotting their mortgage payments in 2021 has blossomed into a movement impacting hundreds of billions of dollars in loans.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/features\/2022-08-03\/china-real-estate-market-crisis-protests-may-spur-multi-billion-dollar-rescue\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Hundreds of thousands<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;of middle-class Chinese homeowners are refusing to make monthly payments until their homes are built.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A protest of this magnitude is rare in China. We all know the famous image of the Tiananmen Square &#8220;Tank Man,&#8221; who stood in front of a row of Chinese tanks in 1989. But usually, the government is swift in squashing dissent. This time, however, they\u2019ve so far failed to control the spread of the protest on social media. Meanwhile, property developers can\u2019t respond to homeowners\u2019 demands because they don\u2019t have access to financing.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How the Chinese Government is Responding<\/span><\/h2>\n\n\n\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.piie.com\/blogs\/realtime-economic-issues-watch\/chinas-looming-property-crisis-threatens-economic-stability\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Economists say<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;these signs indicate a need for China to pivot away from a growth model that is too reliant on property. Economic policy should be focused on raising wages. But instead, the People\u2019s Bank of China slashed interest rates to encourage even more people to buy more property. Most experts agree it won\u2019t do any good.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">One thing that may help, at least temporarily, is the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fortune.com\/2022\/08\/22\/china-central-bank-cuts-interest-rates-housing-bubble\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$30 billion loan fund<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;established to bail out struggling property developers. But that\u2019s only a drop in the bucket compared to the total outstanding debt owed by property developers. And, of course, fixing the problem with more debt has its own harmful economic effects.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Ripple Effect on the U.S. Economy<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">While some experts are less concerned than others, there\u2019s no question that an economic collapse in China will negatively impact the United States. Real estate loans are already&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.piie.com\/blogs\/realtime-economic-issues-watch\/chinas-looming-property-crisis-threatens-economic-stability\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">weighing on the Chinese economy<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;by limiting resources for production. Lockdowns alongside the housing slowdown have driven up unemployment. Inflation rates are declining. Without successful intervention, global trade will be impacted as China would cut back on purchasing goods like cars and aircraft from the U.S.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And as exports to the U.S. also decline, China is likely to spend even less on U.S. Treasuries, which would cause a rise in interest rates to account for less demand. Mortgage rates for fixed-rate 15 and 30-year loans, which are based on the 10-year Treasury yield, would also rise, impacting housing affordability.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A decrease in spending on U.S. Treasuries could also impact the value of the dollar, which rises and falls with demand for Treasuries. If the dollar declines against the Chinese yuan, that will affect import prices\u2014especially gas prices, which are denominated in the dollar. Foreigners would get cheaper gas, as their currencies would be stronger against the dollar, while Americans would pay more at the pump. And, as we know from recent experience, gas prices impact the entire U.S. economy.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How U.S. Property Investors Should React<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">During any economic downturn, diversification of investments provides the best protection against losses. Experts also recommend investing gradually so that you can make decisions as economic changes unfold. That\u2019s possible if you\u2019re exploring passive investment opportunities.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For those looking to actively invest in property, make sure you&#8217;re being cautious with all of the latest news coming out. The housing market appears to be&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/markets-are-at-risk-of-price-declines\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">rebalancing<\/span><\/a><span data-preserver-spaces=\"true\">, but most experts agree a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/is-the-housing-market-about-to-collapse\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">housing crash isn\u2019t likely<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In any event, maintaining a strong cash position is key to financial stability during a recession. If waiting to buy allows you to bolster your emergency fund, you\u2019ll be better insulated financially. That said, if the right property comes along, the numbers check out, and you\u2019re not stretching yourself with the purchase, fears about the economy shouldn\u2019t stand in your way. While all investments involve risk, real estate is a relatively safe option\u2014in the United States.<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Prepare for a market shift<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px\">Modify your investing tactics\u2014not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with <em><a class=\"rank-math-link\" href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&amp;utm_medium=blog%20banner\" target=\"_blank\">Recession-Proof Real Estate Investing<\/a><\/em>.<\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Recession Proof Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/inside-chinas-real-estate-crisis&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/04\/recession-proof.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>China is caught in a self-perpetuating housing market downturn. The only way out may be to relieve property developers, whose nefarious practices contributed to distrust in real estate in the [&hellip;]<\/p>\n","protected":false},"author":613615,"featured_media":144427,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5528,7119],"tags":[],"class_list":["post-144422","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-news","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144422","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613615"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=144422"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144422\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/144427"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=144422"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=144422"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=144422"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}