China's Housing Crisis Has a Long Road to Recovery

building them. The resulting fiasco has shaken China's economy, spawning a mortgage boycott, a crisis of confidence, and homeowners holding the bag. What does this mean for China's debt saddled property developers and what does China's property market future look like? In Japan you have bridges to nowhere, and in China you have houses that nobody wants to live in. And the damage to Pombia's confidence is already and it's very hard to see how is that going to recover. Let's

bring in Christie Hang, a senior property analysts with Bloomberg Intelligence. Christie, Welcome, Hi John, Hi Tom, Thanks for having me, Christie, how bad is China's housing market right now? I would say it's a combination of weak demand and heavy oversupply. You know, in Japan you have bridges to nowhere, and in China

you have houses that nobody wants to live in. You know, just to give your data point, you know, in eight cities in China there are five d one million square meets off and SO homes wait five one million square meters. But that would be the total area of all the homes in the U. S State of Massachusetts. Yes, and you know that is just for eight cities alone, and China has six hundred eighty cities. So it means that the amount of and SO homes in China could be

equivalent to you know, multiple stays in America. So, Christie, how long will it take for trying to sell all these unsold homes? On average, the supply could take around twenty one months to digest, but it does vary across cities. You know, in an extreme case, in jong Jo, which is a city of thirteen million people in China, the housing stock is worth hundred months of seals, which means you know, eight years of seals. Christie, let's take a

step back for a minute. How could this happen? How could China's property market get into such a mess where you've got home buyers paying for homes they can't live in empty cities and developers just settled with debt. What went wrong to make it stumble so badly? It boils down to the pre sales model in China. You know, ninety percent of Chinese homes on a presto basis, and this model works so long as sales kept going up,

and you know, until it's not. Developers then cannot use new money raised from seals to pay the construction of the earlier projects that they sold. In fact, you know, there was the scrow account system in place in China, but with the debacle of every Grand you know, the whole governments are finding out that the money that is supposed to be deposited into this a scrow account is not there. Christie? Is it financial mismanagement? Is it greed? Is it a lack of oversight? Could is it any

of those factors? I would say it's a combination of all those. So Christie, basically you're saying that if you're a Chinese buyer, you put a deposit down on a house that was supposed to be built, but that developer took that money and used it for other purposes in the case of every grand possibly paying their soccer team. But is that the case, yes, or their new ventures on new energy vehicle that they attempts to overtake Tesla. So Christie, how does this compare with the US financial

crisis back in two thousand and eight. Now, you know, we all saw that movie The Big Short, and my understanding is that the US housing market really crumbled because banks were lending to people they shouldn't have, people with bad credit schools and bad FICO schools. Yes, it's a very different story in two thousand and seven, two dozen nine. You know, the crisis in US is demand side driven. We have extended, over extended home bias taking on mortgages

that they can't repay. And in China is a supply side story. We have over leverage developers. You know, since the two thousand and sixteen housing boom, developers have aggressively took on debts to expand their land bank to push for more sales growth, until the government introduced the Three

Red Lines in which limits their debt metrics. You know that for those who can't deliverage the balance ship quickly like ever grant, that leads to the failure and you know, and later a rise bread liquidity crisis for a lot of other private Chinese developers. Christie, a plane crash never has a single cause. Plane crashes are usually the result of many things going wrong, all at the same time,

sometimes and after the other. Would you say that describes China's housing crisis For China, it's more like a slow motion crash um. You know, economists experts have been calling on a crash on the property market for many years, and a lot of people, you know, saw that coming, and a lot of people would think that the regulators could have done something earlier to prevent or to to

to drive a soft landing of the sector. I would say, you know, it's a combination of regulations coming to too two late, and also developers taking excessive risk and homebuyers who have the rosy pictures of home prices would just keep on going up forever, and you know, pouring a lot of money into investment demand or investing in property thinking that prices will keep on going up and until

the party is over. In so Christie, you're saying that Chinese developers have one point for trill and dollars in debt. That's a huge figure. How many of these developers in default everyone's heard of ever, grand I think also SMA as well, can you give us an indication of how many of these developers will even be around in five

years time? Right? You know, um, with the developers that have you know, issued dollar bonds, we have tracked that, you know, around two thirds of them have been struggling with repayment of the debt, and that could pave the way for you know, a more permanent structural change of the sector, because in a few years you'll see, you know a lot of these private Chinese developers, they could

be going out of business. You know, they are undergoing the restructuring process, and these developers are no longer buying new plots of land, which also shows you the way where home cells are going. Christie, we already know how much damage the property crisis has done to homeowners, to borrowers, and to the developers. But is there a threat of a wider contagion that could possibly engulf banks or other

lenders and investors. The case in China is different versus the US is you know, China control a lot of the largest lenders, and with the mid November rescue plan, we are seeing that the government is telling lenders to extend mortgage payments. We schedule the mortgage payments with bias who you know could be struggling with unemployment due to COVID. So it seems that the government is taking the stands that you know, to for banks to offer more grace

periods to homebias and borrowers. So the mortgage delinquency in China right now is still a very minimal number at around one percent. And also at the same time, if you look at the residential mortgage backed securities issuance in China, the size is very small. It amounts to about two GDP and that compare still around fifty pc of GDP in two thousands seven during the US A prime crisis. And it means that a failure in the housing market may not transmit the risk to the securitization market in

China as it was the case in the US. Christie, what has this done to the Chinese middle class longstanding faith in home ownership? I would say that the government needs to work on you know, restoring that faith in home ownership. You know, in one way or another, the precurs model has to go. So the government can either pit fit to you know, the construction of completed homes for sales, or instead of you know, having home bias paying upfront for a pre sol unit, you know, have

them pay in installments to offer some sort of consumer protection. Christie, how long will it take for China to get out of this mess? When I look at the US after two tho E two thousand and nine financial crisis, it appeared that they went through a big V shaped recovery. In the US, it took around sixteen years for new home cells to reach the peak levels originally set in two aouser and five. But for China, home cells in our view might never make it back to the pre

crisis peak. You know, that is based on you know, four structural changes in China. On one hand, you see investment demand is shrinking. Chinese households has always feel property as a one way bad and that has been the case during two thousand and fifteen to two thousand and twenty, when home prices are up five to ten a year until when you know, things started tumbling down. Of the seventies cities, fifty five cities have home prices going down,

and no one wants to know potential home bias. Want to catch a failing knife. And in the medium term for the government has been harping on so long on the mantra of housing is for living in, not for speculation. And number two, we have seen headlines of shrinking population in China and that is going to erow first home and upgrade demand for Chinese homes. And number three, the government is also driving the push for rental housing, so that is going to divert demand away from private home cells.

And lastly, I talked about two thirds of private developers might not be surviving in the medium term, and that means that a lot of the supply that has been coming to the market might not be coming in the coming years. Christine made a very interesting point how China's population is declining for the first time in six decades. What's going on in China Chinese couples not getting married and not having babies, and how is this going to

impact the housing market? Right, So, on one hand, we're expecting fewer new babies and that is going to affect the next generation of home bias. And then on the other hand, we're talking about less marriages. If you look at one person household in China, the numbers has been you know, to seventeen in one versus just eight percent in two or four, and you know it normally requires a couple to pull together, they say things for dunk payment.

So if there blessed people getting married also might impact first home demand. Looks fast forward one year, two years, maybe five years in the future. What does China's property market look like to you? Right? So, I think it would be characterized by um a market with home cells and home prices being relatively stagnant. If I compare with the US, we see home cells going back up to pre crisis level after sixteen years. We also see almost fee shade rebound for home prices, home prices that almost

stubbled in the thirteen years since the financial crisis. That might never happen to China, and that are the factors contributing to you know, a relatively flatish home cells and home price in the medium term. That would entirely change the picture of how people feel Chinese developers. Chinese developers in the past few years that bonds. That equities have attracted a lot of interest because of the strong earnings growth, and that is not going to come back for these developers.

They have to rethink that business model for home sells, you know, that could be on the trajectory of a projected contraction. They have to increasingly diversify into new businesses. They need to go into retail leasing, they need to go into construction management or property management. They need to find new businesses to drive their earnings growth. And in terms of market structure, we're seeing that I've talked about how to third of the private developers might not be

in business in five to ten years. You know, they are caught in the debt trouble. They're undergoing the debt restructuring and that business might never make a comeback. And the Chinese property sector will be dominated by stay owned developers and just a few private players like Country Arden or long Fall that have been able to survive. Christie, how important is the housing market to the Chinese economy

right now? Right? So, just on the housing market itself, real estate investments made up around fourteen of China's GDP and this is a much bigger ratio versus the US

during the supreme crisis. You know, it's just around five percent of GDP, so it means that housing market crash it could be a bigger blow to China's real economy and the actual impact could be even bigger because if you include also the upstream and the downstream industries like materials, constructions, furnishing, and renovation, you name it, that it's going to affect you know, a bigger amount of GDP and people who

employ in those sector. So hold on, Christie, you're saying that China's current housing crisis is almost three times bigger than the US during the financial crisis in two thousand and eight. It is. But the good news for China's is that though the housing market crisis could be just contained within the sector, that compares to the US where you know big NBAS losses that might have not happened to China because NBAS only accounts for around two p

of China's GDP. Christie, think about how China's property crisis has impacted attitudes toward homeownership. Has something fundamentally changed. I think that perception of investing in property could have been changed irrevocably um Chinese people has been selaced about investing in property, and they always think of property as a one way back and that has been true during two thousand and fifteen to twenty when prices go up by five to ten percent a year. Until now this is

no longer the story. You know, our of seventy cities, fifty five cities are having down trend in home insis and people are adjusting the expectation. You know, they are now thinking of property as an asset that has very limited upside. But right now they might have to be rethinking the allocation of investments. And within China there's very

limited investment options. You know. You can think about the shot market, you can think about bank deposits, wealth management products, and then there's the property sector that you can invest in. And unfortunately for a lot of Chinese people, you cannot invest overseas because of capital control. Yea, Christie. You know, China is an extremely vast economy. It's got one point four billion people. Is the dire housing situation the same across all the different cities in China, So it's a

very different stories for the different housing markets. You know, we have read headlines about China shrinking population and if you look at the largest cities like han Jo, which is the headquarter of Ali Baba. Population of Hanjo is still up seven percent a year in the past five years. And if you look at it this way, population inflow is key to drive demanded for those housing markets, and

that compares with smaller cities. They're facing population outflow and there's also weakening investment demand and a lot of oversupply of infantries in those cities, and that is going to cast a shadow over the investment prospect of smallest cities housing market where you see you know, prices facing the biggest pressure and sells also coming down. A famous US president once told Americans during troubled times that the only thing we have to fear is fear itself. Is that

the case in China's housing crisis. Are buyers and borrowers letting fear feed on itself or do you think there's more to it? I think the biggest problem in the Chinese property market right now is very hard to find will link bias. Home bias are increasingly worried about if I'm putting money on a print of property today, is that going to be delivered in two to three years? And with the government's rescue also stopping short of rescuing

a lot of these distrest developers. You know, the the situation is not improving and the damage to home biased confidence is already done and it's very hard to see how is that going to recover? Christie final question, would you buy a house in China right now? And if so, which city would you buy in? I think the answer I always would have for that question is to be shan Jan, which is the headquarter of Huawei and ten

cent um. It is the Silicon valley of China, and buying property is always about looking at supply and demand. It is a city with very limited lens supply and a lot of demand because of population inflow into the city because of you know, economic prospect and job opportunities. So with the latest run of adjustments and you know, some downtrend in prices, it could be a good entry point to think about infesting in a property in chian Gin. And it's also the case for you know, a lot

of the tier one cities in China. I would avoid low tier cities um as you say, you know, ghost tanks, a lot of supply and population outflow and very weak investment demand, meaning that these properties would continue to face price pressure. Christie Hung, senior analyst with Bloomberg Intelligence. Christie, it's a remarkable story what's happening in China, and it sounds like there's gonna be a lot more to talk about before it's all over. Thanks Tom, and thanks John.

It's great to be here. I'm Tom Corbett in Hong Kong and I'm John Lee. And you've been listening to the Asia Centric podcast.