A property crisis in China risks spreading to other parts of the market

China was supposed to be one of the areas of strength for 2022. Recent developments in their property sector risk reversing progress and taking down other parts of the market.

The property sector makes up 25% of China’s economy

Over the past 20 years, China experienced the biggest property boom in history. Developers went on a building spree and loaded up on massive amounts of debt.

• Worried the market was overheating, Beijing took action last year to slow China’s housing market. It might have worked too well…
• Home prices fell, and sales slowed — falling for the past 11 months.

This led to China’s largest property developer, Evergrande and 30+ other developers defaulting on their debts since last December.

Then the situation began to spiral…

Construction on many of Evergrande’s projects has paused since its default. Last week, Chinese consumers boycotted mortgage payments on properties where developments have stopped.

This impacted 300 projects across 50 cities — pressuring the market even further:

• Falling housing prices have spillover effects on the rest of the market — even outside of China.
• A slowing housing market means less demand for raw materials (i.e., steel, copper) and consumer goods like furniture and electronics.

Over the weekend, China censored online data on the number of mortgages being boycotted — making it difficult to gauge the impact.

Investors: How could this play out?

Analysts estimated that $150B-$370B in mortgages are at risk — 2.6%-6.5% of the total $5.7T mortgages held by Chinese financial institutions. The impact is seen to be quite small.

Analyst Charlene Chu — who warned about the debt bubble, thinks:

• We’re still early into the defaults, and it could take a “long time” to play out.
• The probability of a financial crisis is low but sees China’s moving into a low-growth period.

With the majority of the wealth of China’s middle class tied to the real estate sector, the fallout is likely to have negative impacts on other sectors. It’s a question of how far this can spread.

Story is still developing…