Opinion | The moment of reckoning looms large for China’s property market as crisis deepens
- There are signs China’s real estate party is coming to an end, and the moment of reckoning is looming large for property developers, homeowners and the government
- China’s move to allow home ownership in the late 1990s unleashed a spectacular property market boom, leading to phenomenal wealth creation
To understand the crisis gripping China’s real estate sector, it is worth looking into its past. In the first 50 years of the People’s Republic, China did not have a property market as such, as urban residents relied on state employers to provide housing. There were no private developers as all urban land is “owned by the state” under the constitution.
China’s real estate sector started to take off in the late 1980s, when Hong Kong professionals advised mainland Chinese officials in Shenzhen and Shanghai that they borrow a page from the then British colony to sell “land use rights” to investors as part of a long-term lease. Chinese municipal governments immediately lapped up the idea, finding it an excellent source to raise much-needed funds.
China officially kickstarted its real estate market nationwide in 1998, when urban households were allowed to buy and own flats, unleashing a spectacular property market boom thanks to the nation’s rapid urbanisation. Hundreds of millions of people moved into new flats, and property quickly became the most important engine of China’s economic growth.
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Chinese municipal authorities became big winners in the process as they realised overnight they were sitting on massive amounts of wealth. “State-owned” land suddenly became sellable and every single local government jumped on the bandwagon.
In the beginning, it created a positive loop: the more land a local government sold, the more money it could raise for its own development, which in turn could be used to improve infrastructure, pushing up land prices further.