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Chinas Heavy Property Market Is Pulling The Whole Economy Down

News Posted On: 25 January 2015

China property news

China’s economy is running at its slowest rate for more than two decades – and the cause is likely to be the country’s slipping property market. The problems have penetrated to boardrooms, like that of the Shenzhen-based Kaisa Group, which missed a scheduled debt payment of £15m earlier this month. When companies miss payments of that size, the effects trickle down and ripple out, so investors around the world are watching with interest.

Kaisa had a healthy balance sheet, but local government blocked the sale of some of its property units without any explanation. Its chairman and several executives have now stepped down, and courts are being asked to freeze its assets. If Kaisa is the first Chinese property firm to go bust, which is a real possibility at this point, that would be a sign that the economy as a whole and the real estate market have begun to pull each other down.

A house is the most expensive thing most people will ever buy and commercial property often accounts for a considerable proportion of a company’s assets, which means a country’s real estate market is usually an important component of its economy. In countries with high homeownership rates like the USA that can mean that a real estate recovery can actually stimulate the wider economy. In China, though, the real estate market is worth about a third of the country’s whole economy once subsidiary businesses are factored in. A collapse of the Chinese property market would be a collapse of the Chinese economy – and with Chinese money everywhere from Wall Street to Fleet Street and sunk deep into the world’s luxury real estate market, that could be ominous for us all. Even a sharp downturn could have worrying repercussions.

On Tuesday, China announced that its economy grew by 7.4% last year, making 2014 the first year to miss China’s government-mandated economic growth target since 1990. Is that downturn already underway? The housing market certainly isn’t doing too well. For several years people have been pointing out that China’s overbuilt real estate market, with many investors buying homes that show no sign of ever being inhabited, sometimes in towns where no-one lives, has many of the characteristics of a house of cards. And Chinese government data shows 65 of the 70 major cities tracked displaying signs of weakness. Fitch Ratings says it doesn’t expect a ‘meaningful’ recovery in 2015 for Chinese homebuilders, describing 2014 as a ‘trough’ for the industry.

And things may actually be about to get worse. Re3search recently published indicates that China is headed for a demographic shift that will reverse a key driver of the country’s decade-long economic boom. Homes and homebuilding add up to a third of China’s GDP – so what’s going to happen when the generation that’s buying all the homes peaks and starts to tail off? People aged 25 to 49 account for the larger part of China’s homebuyers and they’re about to peak, while a glut of new apartment is arriving on the scene to supply falling demand.

Ai Jingwei, expert on the Chinese property market and author of the damning research, argues that China has about seven years’ worth of unsold real estate backed up already, but he points to demographic factors as holding the real danger long term. ‘From 2015, China’s house-buying demographic will start to shrink and the property market will undergo a structural shift in demand,’ said Mr. Ai. ‘We are actually likely to see a serious structural shortfall in purchasing power.’ If Mr Ai is right, the resulting ripples will reach far beyond China.

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