Much of the issue is that regular Chinese citizens don’t have the ability to invest in the Chinese stock market. As a result, they have very limited options for investing.
As Chinese incomes grew, they started to have surplus that they wanted to invest somewhere. Real estate filled that role. This all started as a way to house China’s growing population in urban centers, but quickly spiraled out of control.
All of the sudden, you had Chinese citizens investing significantly in real estate just as a means of putting their wealth somewhere to appreciate. This cause an artificially high demand in real estate, as you had all of these units being built with no one having the intention of living in them. You also had multiple people investing in a single unit, with fractional ownership.
Basically, you had a massive bubble being blown up based on artificial market conditions that sprung up too quickly. Once the market conditions started to deteriorate, the investors wanted to liquidate their positions but no one wanted to buy. Call it a Ponzi scheme, call it a bubble. Ultimately it was too much money thrown into a illiquid asset class by inexperienced investors.
It is estimated that the property market was around 20% of the Chinese economy. That is huge (about the same proportion as the US healthcare industry to the US economy). Unfortunately it was also very heavily leveraged ie in debt. Property developers used down payments (and often the entire payment) to leverage new construction and Evergrande was the largest single private debtholder in the world (not only China) when it went under with an estimated 300bn USD of debt. For comparison, Argentina defaulted on their national debt of 90bn USD in 2001. A single company had 3 times this in 2019.
Property was highly overbuilt. One estimate is that there were nearly 60m home units built or in construction that were left empty or unsold. (This is more than the entire housing stock of Germany)
This event cascaded through all the property developers. A developer that could not complete the houses that they were already paid to deliver. Home buyers were naturally spooked and reined in new purchases which then affected all the other developers. Banks now had tons of debt that they could not collect on because the company was bankrupt and the government did NOT want more companies to follow and forced banks not to foreclose. This of course also means the banks were more reluctant to lend to other companies (not necessarily property developers).
On top of that, land sales were a huge part of local government revenues. So property developers not building meant no one buying up their land leading to huge shortfalls in government revenues (and therefore local spending on education, infrastructure etc). Then there are the supporting industries – construction companies, building materials, furniture companies, appliance companies etc all who depended on healthy home sales and construction.
The COVID measures taken by China, basically zero population growth, fewer young people, low marriage rates (customary for newlyweds in China to buy/own property) all contributed. Twenty years of property price increases also meant that a lot of urban property was valued at nearly 30 years of average household income. (Most OECD countries are considered overvalued when this ratio hits 10)
Other answers will go into greater detail, but to keep it simple: they built too many apartments. There are pretty much twice as many apartments as there are Chinese people to live in them. With a low birthrate and negligible immigration, the apartments are not going to appreciate in value over time as the population of China shrinks over time. Many of the buildings were built cheaply and with poor construction standards and will likely deteriorate surprisingly quickly.
TLDR: The population is shrinking, there are too many houses already, demand for housing goes down, prices go down.
Comments
Much of the issue is that regular Chinese citizens don’t have the ability to invest in the Chinese stock market. As a result, they have very limited options for investing.
As Chinese incomes grew, they started to have surplus that they wanted to invest somewhere. Real estate filled that role. This all started as a way to house China’s growing population in urban centers, but quickly spiraled out of control.
All of the sudden, you had Chinese citizens investing significantly in real estate just as a means of putting their wealth somewhere to appreciate. This cause an artificially high demand in real estate, as you had all of these units being built with no one having the intention of living in them. You also had multiple people investing in a single unit, with fractional ownership.
Basically, you had a massive bubble being blown up based on artificial market conditions that sprung up too quickly. Once the market conditions started to deteriorate, the investors wanted to liquidate their positions but no one wanted to buy. Call it a Ponzi scheme, call it a bubble. Ultimately it was too much money thrown into a illiquid asset class by inexperienced investors.
It is estimated that the property market was around 20% of the Chinese economy. That is huge (about the same proportion as the US healthcare industry to the US economy). Unfortunately it was also very heavily leveraged ie in debt. Property developers used down payments (and often the entire payment) to leverage new construction and Evergrande was the largest single private debtholder in the world (not only China) when it went under with an estimated 300bn USD of debt. For comparison, Argentina defaulted on their national debt of 90bn USD in 2001. A single company had 3 times this in 2019.
Property was highly overbuilt. One estimate is that there were nearly 60m home units built or in construction that were left empty or unsold. (This is more than the entire housing stock of Germany)
This event cascaded through all the property developers. A developer that could not complete the houses that they were already paid to deliver. Home buyers were naturally spooked and reined in new purchases which then affected all the other developers. Banks now had tons of debt that they could not collect on because the company was bankrupt and the government did NOT want more companies to follow and forced banks not to foreclose. This of course also means the banks were more reluctant to lend to other companies (not necessarily property developers).
On top of that, land sales were a huge part of local government revenues. So property developers not building meant no one buying up their land leading to huge shortfalls in government revenues (and therefore local spending on education, infrastructure etc). Then there are the supporting industries – construction companies, building materials, furniture companies, appliance companies etc all who depended on healthy home sales and construction.
The COVID measures taken by China, basically zero population growth, fewer young people, low marriage rates (customary for newlyweds in China to buy/own property) all contributed. Twenty years of property price increases also meant that a lot of urban property was valued at nearly 30 years of average household income. (Most OECD countries are considered overvalued when this ratio hits 10)
Other answers will go into greater detail, but to keep it simple: they built too many apartments. There are pretty much twice as many apartments as there are Chinese people to live in them. With a low birthrate and negligible immigration, the apartments are not going to appreciate in value over time as the population of China shrinks over time. Many of the buildings were built cheaply and with poor construction standards and will likely deteriorate surprisingly quickly.
TLDR: The population is shrinking, there are too many houses already, demand for housing goes down, prices go down.