One of the most worrying economic stories in the world right now is unfolding in China’s real Estate sector. To put in perspective;

Despite the fact that China real estate crisis threatens international trade, experts predict that India, particularly its steel makers, may actually benefit from it.

“This could be a silver lining for India’s steel industry,” Arun Malhotra, founding partner & portfolio manager at CapGrow Capital advisors, said.

“The collapse in the Chinese property market will also cool down the commodity prices that should benefit India as a whole,” Malhotra added.

This can be a golden opportunity for the Indians to establish its firms and replace China. Records show that India is the second largest steel producing country after China and so the opportunity seems obvious for Indians.

The Indian real estate market has grown rapidly and has proven resilient to geopolitical shocks because of work from home opportunities and rising income levels.

“Indian Real estate is primarily dependent on domestic demand which is strong enough after the pandemic lull and work from home option,” Sharad Chandra Shukla, director, Mehta Equities Ltd, said.

“The huge government focus and building of highways and other infrastructure are all leading to urbanisation and increased consumer spending creating demand for both housing and commercial real estate,” Malhotra added.

China’s housing crisis: what led to it?

The Chinese real estate market is in debt. Large real estate developers like the Evergrande have racked up enormous debts, which has caused construction to halt and enraged many homebuyers.

Here are some figures. In the last year, 21 major developers have defaulted on their debts, led by China Evergrande Group, the country’s second-largest real estate company, which is saddled with $300 billion in liabilities. According to S&P Global Ratings, approximately 20% of the Chinese developers rates are insolvent.

As China’s economy falters, homeowners are boycotting mortgage payments in an attempt to save their homes. 

Banks in China are facing $350 billion in mortgage losses, in the worst-case scenario, as confidence in the country’s real estate market plummets and authorities attempt to contain the spiralling unrest.

Investors have been concerned since last year that the financial woes of Chinese real estate developers would affect the entire economy. The unwillingness of many homeowners to make their mortgage payments over the past two months has brought developers’ issues back to the fore, even as China’s economic growth slows.

Impact on other sectors

If China’s real estate issues don’t get better, they could spread to other important industries. According to ratings agency Fitch, three specific industries are most at risk including Asset management companies, Engineering, industrial sectors, stockpiles of rebar, construction firms (non state-owned), and Smaller steel producers.

According to Fitch’s analysis, larger companies and those connected to the federal government were less susceptible to a decline in real estate than were smaller companies or those in alliance with local governments.

Small and regional banks, which account for around 30% of the banking system’s assets, Fitch said, have higher risks than other banks. However, the ratings agency pointed out that risks for Chinese banks as a whole could increase if the government dramatically loosens its lending criteria for distressed real estate developers.

“If timely and effective policy intervention does not materialise, distress in the property market will be prolonged and have effects on various sectors in China beyond the property sector’s immediate value chain,” Fitch analysts said in a report Monday.

“Fitch believes the recent rise in the number of homebuyers suspending mortgage payments over stalled projects underlines the potential for China’s property crisis to deepen, as diminishing confidence could stall the sector’s recovery, which will eventually ripple through the domestic economy,” the report said.” – Fitch Ratings

Some neighbourhoods in major Chinese cities have essentially abandoned their mortgages.

In an effort to prop up the market, China’s government has offered a range of incentives, including subsidies for home purchases and increased credit availability. But these measures may not be enough to stop prices from crashing completely. The slowdown in China’s economy combined with increasing competition from abroad is likely causing many people who bought property during the country’s rapid real estate boom to lose money.

The China real estate crisis is only going to get worse in 2022 as the market becomes increasingly saturated. This means that prices will continue to drop. In some cases, people have even become homeless as their homes have been taken away from them by banks or government officials.

A developer in need of customers in China’s slumping real estate market recently offered to accept wheat and garlic as down payments.

The Henan-based central China real estate advertisement , with the title ” Swap wheat for house” says buyers can use the crop. The price of the crop is 2 yuan per catty, a Chinese unit of mass equal to roughly 500 grams, to offset as much as 160,000 yuan ($23,900.22) of down payment in one of its developments.

The China real estate crisis and Chinese housing crisis are predicted to have a global impact in 2022.

This is likely to have a major impact on the global economy as a whole, as China is one of the world’s leading economies. If its housing crisis spreads throughout the rest of the world, it could cause a massive financial meltdown. So be prepared for all sorts of weird and wild economic news coming out of China in 2022 – you never know what might happen!

The Chinese real estate market has been in a downward spiral for some time now, with prices for residential property falling steadily year after year. This has had a significant impact on the Chinese economy as a whole, and it’s expected that the Chinese housing market will follow suit. China’s home prices and sales have dropped for a record-breaking 11 consecutive months.

Developers that are drowning in debt and have millions of unsold flats and unfinished projects won’t likely be in a position to purchase more property anytime soon. In early 2022, the land income received by local governments decreased by 31% annually. New concessions made to both citizens and developers may have disastrous financial effects. Beijing has not revealed any comprehensive answers to these issues.

As China’s economy slows down, more people are forced to seek shelter in other forms of housing, like apartments or homes that they can rent out. This has created an incredible housing crisis in China, which is likely to spread to other parts of the world as well. 

What’s behind the decline in sales?

After decades of rapid growth, sagging sales in the sector surprised many investors last March (2021). The market’s value continued to decline as a result of fewer buyers between homeowners and developers.

Compared with last year, first-half residential housing sales have fallen by 32%, according to Fitch. Researchers cited in the report predicted that the 100 largest developers faced even worse sales, by 50% reduction in sales.

Beijing’s attitudes toward real estate developers, however, have recently shifted from support to caution. The issue of industry-wide debt is a significant factor. In fact, some experts think that the real estate market is an impending financial bubble that has been distorted for years by government meddling and liberal lending practises. 

Can the government actually fix the problem?

China’s central bank announced a strict “three red lines” policy in August 2020, placing restrictions on the ratios of a developer’s debt to its cash, equity, and assets. This was the final blow to the country’s efforts to control skyrocketing prices, which had been the subject of regulatory changes since 2017. The real estate industry quickly entered a downward spiral, with a sudden and sharp increase in bond defaults, missed payments, and halted projects.

The Chinese government has essentially been encouraging people to buy property as an investment. However, the market has become saturated and there are now far more buyers than available apartments and homes. In some areas of Beijing, 60% of all housing is already occupied – leaving many families living in cramped conditions or even homelessness. This artificial demand has caused prices to rise rapidly out of reach for most ordinary citizens, with the result that a large number have lost their homes and are facing massive financial difficulties.

This crisis is likely to have a significant impact on the global economy, as well as on our own country. The Chinese government has already started to try and moderate the market by limiting access to credit, setting off a wave of panic selling that is still causing problems. In addition, China’s slowdown is also resulting in an exodus of economic migrants – both in search of jobs and for opportunities to buy property overseas. This will add another layer of complexity and volatility to the world economy.

Given that the industry requires extensive reform and deleveraging incentives, the government steps need to be watched for to see the results.

The ripple effects are impacting the entire Chinese economy—it grew only 0.4% in the last quarter compared to the previous year—and may turn contagious around the world.

The situation in China is due, in part, to a combination of factors:

• The economic slow down is majorly brought on by Omicron breakouts and the protracted lockdowns in several areas of China from March to May;
• Rapid urbanization creating too much housing for consumers who can no longer afford it;
• High unemployment.
• A housing market in crisis.
• Sluggish consumer spending during lockdowns.
• A slowdown in domestic demand as the Chinese population ages and gets richer.
• Government intervention that has created artificial markets.

China must balance COVID-19 mitigation efforts with promoting economic growth in the near future. With significant public investment, tax breaks, policy rate reductions, and a more dovish posture on the real estate market, the government has increased macroeconomic policy easing. The challenge facing policymakers is how to keep the policy stimulus effective as long as mobility constraints continue, despite the fact that China has the macroeconomic room to overcome the slowdown in GDP. Repeated COVID-19 outbreaks are diminishing the efficiency of policy interventions, weighing on private investment and consumption, and increasing economic uncertainty.

China’s housing crisis likely to affect us all:

House prices in mainland China have gone down in recent months, especially in the month of May and it’s a second month in  a year. With the depressed and low demand persist due to COVID widespread curb measures impacted already weak buyer confidence. This is an alarming situation for the policy makers to evoke market.

However, the latest news has something positive to speak about China’s economy.

The news read, China’s GDP expanded in July despite a housing crisis and other problems. China’s COVID outbreak has evolved during the past month, with cases falling in Shanghai and the surrounding provinces but high elsewhere, with new lockdowns and restrictions being implemented.

We conclude with the ray of hope; despite COVID outbreak unrest across the country, China’s economic recovery gained traction in July, 2022 as business activities resumed and confidence improved.

Any further development whether good or bad is only a wait and watch situation.

FAQS

What’s Happening in China?

China’s economy has been slowing down for a number of years now. But the biggest recent hit has come from the real estate sector. After years of speculation and investment, there is an oversupply of housing units and many developers have gone bust. This is causing prices to plummet, leading to debt defaults and even more instability in the market.

The Chinese government tried to address this by issuing restrictions on new home purchases and raising interest rates on mortgages but it was too little, too late. As a result, people are losing their homes and the Chinese economy as a whole is being dragged down with them.

What Could Happen Next?

China real estate crisis has some serious global implications. If prices continue to fall, more developers will go bankrupt and this could lead to even more debt defaults in other parts of the world, like the US. This would further reduce consumer spending and impact businesses across the board. In fact, according to one estimate, China’s real estate crisis may already be responsible for at least 1% of global economic slowdown over recent years!

It’s unclear what will happen next but there are already signs that the Chinese economy may start to rebound in the next quarter. However, it will take time for everything to catch up and there could be more turbulence along the way.

According to one study, housing sales fell 27% in volume year-on-year between January and June. And it’s getting worse. July sales fell 13% from June and 27% from a year earlier across 100 major Chinese cities. Consultancy firm Capital Economics estimates that about 30 million newly developed properties remained unsold last year, while about 100 million more were likely to have been bought but not occupied. Home prices dropped for the 11th straight month in July. S&P expects property sales to fall by a third in 2022.

This is causing a lot of debt defaults in other parts of the world, like the US. For example, there was a massive real estate bubble in Dubai that has now burst and caused major financial problems for many people. If China’s real estate crisis continues to spread it could have serious global implications.

The debts total around $91 billion, or about 5% of overall Chinese credit default swaps (CDS). And the problem is only going to get worse: with China’s population reaching 1.4 billion in 2020 and an estimated 350 million more people expected to move into urban areas by 2025, developers will be even more eager to cash in on this so-called “One Billion Urban Residents Boom”.

What Can Be Done?

The Chinese government has been struggling mightily to prop up the economy and prevent a full-blown financial crisis from happening – estate company, which has been creaking under $300 billion in liabilities. S&P Global Ratings has warned that around 20% of the Chinese developers rates are at risk of insolvency.

China’s housing crisis Questions: China Real Estate Crisis

What happens if China housing bubble bursts?

Real estate developers, home owners, housing speculators, banks, the financial sector, and China’s construction and building materials industries will be severely impacted if the bubble spirals out of hand and bursts. Property owners and developers will observe a quick depreciation of their investments.

What is happening with China’s real estate?

According to a research released last week by Beike Research Institute, a division of Chinese real estate sales and rental behemoth Ke Holdings, the average residential property vacancy rate in China’s 28 main cities was 12%.

Is Evergrande crisis over?

Evergrande’s stock trading ceased on January 3, 2022.

Will Evergrande make a comeback?

PLAN FOR RESTRUCTURING

Even though creditors would receive very little money through a bankruptcy or fire sale of Evergrande assets, the developer is moving on with its asset disposal strategy in an effort to reserve those funds for restructuring, according to the reports

What caused Evergrande crisis?

Evergrande, a Chinese property giant with liabilities in excess of $300 billion (£228 billion), has failed to make interest payments to international investors. As a result, Evergrande is in crisis.

Will China’s real estate collapse?

No one really knows for sure, as China’s economy is so complex and tightly interconnected with the rest of the world. But if you are worried about what might happen next, here are four key questions that need answering:

1) What happens if China housing bubble bursts?

2) Is China real estate market crashing?

3) What is happening with Chinese real estate?

4) Why is China cracking down on its real estate sector?

To find the answers of these questions go back to the front paras.

Referred Sources: News Articles, Mint, New York Times, CNBC, Business Standar.com.

Article covers: Real Estate  | China | Evergrande

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