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Opinion | Avoiding the pain of China’s housing crisis risks infecting the wider economy
- The growing housing crisis threatens to spread like previous financial contagions and damage economies across the globe
- Policymakers need to let poor performers suffer the consequences of bad bets while looking after solvent banks and enacting land and property reforms
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History has shown that financial crises are often the story of either a housing bust or stock market collapse – or both. Think of the crash of 1929 that started as a Florida-driven housing boom-and-bust cycle and morphed into a stock market collapse that shook the United States and the world.
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Or consider the 2008 global financial crisis, which started with complex derivatives in subprime mortgages and was rapidly transmitted from bank to bank and market to market as investor panic rose. In 2022, the latest iteration of a damaging housing price collapse is unfolding in China. It will be felt widely, slowing other economies and radiating outwards.
What started with US$300 billion in debt held by Evergrande is spreading quickly and dangerously as developer after developer defaults. The knock-on effects are real and growing. When builders default, they stop paying their suppliers, those companies fail to pay their workers and the lay-offs start.
With construction making a significant contribution to China’s economy, defaulting developers are just the beginning. With developers in trouble, investors and Chinese mortgage holders are losing confidence in firms and the country’s economic outlook.
Chinese borrowers are already revolting. Hundreds of thousands are refusing to pay their mortgages, worried they might never see their flats completed. Many buyers in China purchase flats before they are built, and the developer then uses the cash to complete the construction. Buyers are rightly alarmed that firms will go bust before the dwellings are complete.
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Growing anger over China’s unfinished ‘rotten tail’ buildings: ‘We really need this home’
Growing anger over China’s unfinished ‘rotten tail’ buildings: ‘We really need this home’
Buyers today in mainland China are alarmed as they look at falling prices, which were down 0.9 per cent year on year in June across major cities. With as much as 70 per cent of Chinese wealth tied up in housing, price falls and a collapse in sentiment could be very bad news.
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