China Housing Market Crisis Given New Theory

The concentrated nature of the real estate industry in China was a key factor triggering the ongoing property market crisis in the country, a new study by the University of Michigan has found.

In 2018, a few years before the beginning of the market’s downturn, the top five real estate developers in China accounted for 30 percent of the country’s entire housing production—compared to a share of 13 percent in the U.S. The collapse of some of the biggest developers in China—Evergrande and Country Garden—inevitably dragged the market down, the University of Michigan’s study concluded.

China’s property sector had been booming for years before it entered the current crisis, driving much of the country’s explosive economic growth in recent decades. But after years of risky investments, overborrowing and overbuilding, the property sector started to unravel after the government introduced new borrowing rules in 2020 to prevent a housing market bubble from bursting.

In December 2021, property giant Evergrande defaulted on its bonds and was later ordered to liquidate. Its collapse sparked a financial crisis that enveloped the entire housing market in China, with several companies defaulting and homes remaining uncompleted. In October 2023, another Chinese giant property developer, Country Garden, was declared in default of its debt. It is still working on an offshore debt restructuring plan.

The housing market crisis has been an earthquake for the Chinese economy, which has been struggling with other challenges such as high youth unemployment, soaring local government debt and a weaker yuan. The property sector amounts to more than a quarter of all economic activity in the country, according to the International Monetary Fund (IMF).

The ongoing crisis has exposed the faults in the housing production model in China, which since the early 2000s has favored a concentration of power within the hands of a few conglomerates while discouraging that of local industry, which remains largely decentralized.

Large firms prevailed because they had the advantage of easy access to low-cost capital, an open land market system and the use of pre-sale business practices. In China, land is owned by the state and sold to the highest bidder via an auction process. The result is that only developers with sufficient funds—often the largest firms—can win the bid.

The pre-sale model also favors large developers, as it transfers buyers’ downpayment—as well as their mortgage loans—to developers during the development process. These are then used as development capital. Because of the risks associated with pre-sales, homebuyers in China prefer purchasing housing from large firms with established records, the study found.

These large developers expanded across the nation, overbuilding in places that didn’t need that much supply. But when the local market took a downturn, as they did during the COVID-19 pandemic, these large firms could quickly withdraw from these areas, exposing local economies to dire consequences, according to the University of Michigan’s study.

“The concentration of the real estate industry not only exacerbates challenges for the national economy, but also brings negative impacts to local economies,” Lan Deng, professor of urban and regional planning at the University of Michigan, said in a press release shared with Newsweek.

China is trying to bounce back and move away from the property sector. Last month, China’s gross domestic product (GDP) expanded by 5.3 percent in the first quarter of 2024, according to official data—a stronger-than-expected start to the year.