Too many homes for 1.4 billion people
- Manuel Alexandre
- 28 de mar.
- 2 min de leitura
Under Mao Zedong, China's housing system was state-controlled, with apartments given to employees at no cost. Private homeownership was prohibited, as housing was viewed as a public necessity rather than an investment. This arrangement limited urban expansion, resulting in minimal housing standards and constrained economic growth.
China's shift towards market liberalization began in 1988 when the government allowed the private leasing of state-owned land for periods of up to 70 years. Ten years later China completely opened up the market to private developers and individual buyers. The result was a surge in homeownership, rapid urbanization and economic growth.
Between 1998 and 2020, China's real estate sector experienced explosive growth, driven by a growing middle class hoping to invest in property. Developers benefited from easy credit and rising property values. Housing became the preferred investment vehicle for households. However, this brought financial risks created by excessive borrowing and speculation.
The roots of China's current housing crisis can be found in this era of unchecked growth. Developers, fueled by debt and expecting endless demand, borrowed heavily, creating unsustainable business models. Aware of the risks, the Chinese government introduced the "Three Red Lines" policy in 2020, placing limits on developer debt. This tightening of credit forced many indebted developers into liquidity crises, most notably Evergrande. As a result, around 48 million homes were sold but unbuilt.
Evergrande used to be China's largest property developer and was known for its speculative excesses. By 2021, it accumulated debts of $300 billion, triggering its collapse. This failure revealed weaknesses across China's housing market, mainly the reliance on pre-sale funding and overly aggressive expansion strategies. Evergrande's downfall created a chain reaction that impacted other developers and shook investor and consumer confidence.
Adding to these financial issues, China now faces significant demographic challenges. An aging population and declining birth rates slowed urban migration and reduced the demand for new housing, complicating the sector’s prospects for recovery. This reduction of demand for new housing indicates the end of the era of rapid property-driven growth.
In response to this crisis, state-backed companies have increased their presence in the real estate market. According to the Financial Times, state-backed companies accounted for more than 50% of land purchases in 2023, a considerable rise from about 20% in previous years. This is the result of the government’s decision to directly intervene and reverse the consequence of the liberalization period. Although state-backed companies' involvement provides short-term stability, it risks introducing long-term market distortions.
Going forward, China’s real estate sector will likely undergo a major restructuring. With demographics shifting and state involvement increasing, the country appears to be moving away from relying on real estate as a primary economic driver. This will likely result in more stable property prices and reduced speculative investment.
Ultimately, China's housing market is a good example of the complex balance between market liberalization, speculation, and state control, showing both the advantages and disadvantages of a freer market.
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