Reposting a thread by Market Sentiment on China’s Real Estate Market




China’s Real Estate Market is considered the ‘most important sector’ in the world. The total value stands at $60 Trillion – More than the entire US Equity market and 2x our housing market. It’s unraveling now with S&P predicting 30% drop -> 1.5x worse than 2008 crash

Chinese Citizens are obsessed with real estate as their Stock market is completely opaque and still hasn’t recovered from the 2008 crash. It was the real estate market that propelled China’s rapid growth ever since the 2008 crisis.

As investors piled on to the real estate, 70% of China’s household wealth is now tied to properties. The real estate craze was so high that buyers had to pay up to 30% of home value and start paying their mortgage even before the construction started

As with all types of hype bubbles, people thought that the value of real estate would never decrease. Home buyers would spend as much as a 23X their annual income to buy a home, with the mortgage sometimes taking up more than half of their gross take-home pay.

This led to property developers creating a Ponzi scheme where they sell projects that haven’t yet started and use that money to start other projects and the cycle continued. The problem became public when the pre-sale properties were not being completed.

As more and more properties fell behind on construction, buyers have staged a mortgage boycott where “All homebuyers with outstanding mortgage loans will stop paying, unless construction resumes”

This is a vicious cycle where homebuyers are halting mortgage payments which then would strain the property developers causing further construction delays. Sales of apartments nationwide have slumped annually for 13 consecutive months forcing the Govt to step in.

The United States Federal Reserve even came on record to say that: “the fragility in China’s real estate sector could spread to the U.S. if it deteriorated dramatically”

China, instead of playing it safe, has done the unthinkable by lowering interest rates and injecting more money into the economy as a last-ditch effort to stay afloat a little bit longer. But Economists think that this could be too little, too late, and too inefficient.

As Goldman Sachs pointed out, mortgage boycotts have made people reluctant to buy a home, which resulted in 30% lower sales. This in turn reflects a loss of confidence in the housing market and throughout the entire economy.

Since China publishes its own numbers and maintains an extremely tight grip on the economy – They can keep kicking the can further and further into the future. But, eventually, data will come out and it’s going to have serious consequences in the U.S as well.

The U.S has substantially increased investment in China over the past decade. Adding to this, the U.S equity market also has exposure to Chinese companies. The direct impact might be low but the perception of things getting worse could have ripple effects on our markets.


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