China’s one-way real estate boom under doubt as buyers show lack of interest

China’s housing boom which earlier seemed like a one-way boom has come under doubt as consumers continue to show a lack of interest in buying real estate, even during a recent Golden Week holiday, usually a bumper period for sales, The New York Times reported.
According to The New York Times, the housing crisis has posed a major challenge for China’s political leadership. Even when the financial markets are questioning the future of China’s economy and households are abandoning their faith in the Chinese Communist Party’s promise of a better economic future,
Economists, investors and central banks around the world are warning of the risks to China’s financial stability, calling on Beijing to act to stabilize the housing crisis. The International Monetary Fund’s chief economist, Pierre-Olivier Gourinchas, said last week that China’s real estate crisis was undermining confidence and causing financial difficulties.
“The problem is serious,” he said at a summit of policymakers in Marrakesh, Morocco. Both the World Bank and the IMF have cut their growth outlook for China’s economy.
China needs to recalibrate, according to economists, to be less dependent on investment in areas like infrastructure and real estate and more reliant on consumers.
“The challenge has been trying to give the sector enough support to cope with the transition without stimulating another property bubble or a rebound that makes these problems worse,” said Julian Evans-Pritchard, the China country head at Capital Economics, a research firm. “To get a turnaround in the economy,” Mr. Evans-Pritchard added, “you really need the property sector to stabilize.”
Chinese officials have tried to put a floor under falling real estate sales in recent weeks but so far to little effect. Country Garden failed to make a payment on nearly $200 billion of debt on Tuesday and still has more than 400,000 apartments that it sold but has not finished building.
According to The New York Times, for years, everyone bet on housing. Local governments lined their coffers with the proceeds from selling land. Families invested in apartments. Jobs for builders, painters, landscapers and real estate agents were in abundance.
Before its collapse set off the housing crisis, Evergrande, the Chinese real estate developer was a story of success that ran alongside China’s growth. Founded in 1996 by the entrepreneur Xu Jiayin, who is also known as Hui Ka Yan, Evergrande built apartment complexes that helped to urbanize large sections of the country just as China’s agrarian economy began to embrace capitalism.
As Evergrande borrowed from Chinese banks and foreign investors to fuel a rapid expansion, it became a behemoth with thousands of subsidiaries. It moved into businesses like bottled water, pig farming, electric cars and even professional soccer, The New York Times reported.
Evergrande’s model was copied by other developers and real estate became the single-biggest contribution to China’s breakneck growth. In 2020, the central government turned its focus to the debt that had piled up and restricted the ability of real estate companies to borrow from banks. The policy, known as the “three red lines,” put a limit on how much debt developers could have and left companies like Evergrande scrambling for cash and turning to more risky ways to avoid a cash crunch.
As per New York Times, Evergrande ramped up an industry practice of raising money by selling apartments before they were built. It also turned to employees, telling them to invest in short-term loans or lose out on bonuses.
And it persuaded people who had already bought Evergrande apartments to buy investment products offering huge returns. Meng and his parents were promised 8 and 9 per cent interest on their investments. They made money on two of them in 2021, but by the next year, interest payments had stopped altogether.