With thousands of buildings and incomplete and abandoned towers alongside empty shopping malls, China’s uninhabited apartments that take up 70% to 80% of a household’s income can accommodate over 3 billion individuals, according to Bloomberg.
Since 2020, China’s property market has been in a constant decline as prices constantly fluctuate and have more than doubled since. Due to the high prices, there have been various concerns as to how the population, in which a large proportion are those who work in factories with the bare minimum wages, will be able to afford even a studio apartment.
Image Source / Credit: CNN
Country Garden is the biggest property developer in China, however, they have incurred hundreds of billions of dollars in debt.
At the start of the 21st century, China’s property market was booming, as construction was at its highest peak. This caused the property prices to double, however, they have only increased ever since as more property developers became privatised (a factor that also made housing low quality despite higher prices). This forced people to live in tightly packed dormitories provided by the government, as more urbanisation took place.
Property in China was usually seen as a great investment opportunity, given that property prices kept on appreciating. However, borrowing and overbuilding has become widespread. For instance, Country Gardens, a property developer that has over 3,100 projects spread across China, is the biggest property developer. This is then followed by other major property developers such as Evergrande, that have over 700 projects around China. These major property developers are constantly building more and more towers that are not even completed to todays date, given that these property developers have hundreds of billions of dollars in loans from the government, and that companies like Evergrande and Country Gardens are not able to get enough capital from selling the units before the building/site is even completed (a strategy that failed; used by hundreds of major property developers in China to raise capital to build more capital).
Image Source / Credit: Cato Institute
A project (in terms of property) is not just one building, it can also be a cluster of tens and hundreds of buildings.
With no money available for property developers to keep on expanding as sales reduced, less capital is available for property developers like Country Gardens, causing them to leave projects incomplete. Despite this, small portions of investment and property developers being forced to take significant loans from the government helped complete some projects. However, as the government constantly provides more and more capital to these large property developers to prevent them from declaring bankruptcy, less money is available to spend on other essential public goods and services, such as healthcare (leading to a significant opportunity cost).
Subsequently, the government of China, controlled by the CCP (Chinese Communist Party), has ordered property developers like Evergrande to liquidate their assets, and party leaders, namely Xi Jinping, enforced policies to use property as a medium of living rather than investment. This was known as the Three Red Lines policy that was enforced in 2020.
Image Source / Credit: The Japan Times
There are thousands of unfinished skyscrapers and property in China (enough to house 3 billion people)
This meant that demand was forcefully reduced, and with the lack of provision of loans/financing to property developers, they had to sell all of the properties that they had built to pay off the loan taken from the government (that was already in an increasing debt of $12.58 trillion). However, individuals who have spent hundreds of thousands of dollars on properties that are not even completed, have to be compensated with a different property that could be of lower quality, consequently leading to protest. Additionally, with smaller private businesses not being able to get financing, they shut down immediately, while the larger businesses could not be able to adapt to these rules. This led to construction stopping, and property developers being declared in default, meaning that they could not adapt and failed to make any form of repayment.
With cities being turned into abandoned blocks of cement, overbuilding and property developers such as Evergrande have lost control and are unable to liquidate their assets. This could have potentially devastating consequences, given that most property developers have empty units and lack of capital to build properties desired by individuals for investment, causing them to declare bankruptcy, however, it will be even more devastating when a global superpower, suffering from deflation, will experience a major loss from a sector that contributes to over 30% of their GDP (Gross Domestic Product). Nevertheless, the Chinese government has pledged to lower interest rates for loans after companies like Evergrande can liquidate their assets, decreasing costs to the population. However, social, political, and financial instability is and will be prominent, as the property crisis grows and leads into 2025. Lastly, other financial hubs such as London and New York could be impacted alongside commodity producers such as Chile if the property crisis for the potentially once-superpower country grows.