Chinese Real Estate Crisis: Buyers Left Desperate as Evergrande and Country Garden Collapse

But many of them had already been sold to people like Mr. Guo.

“We wanted to help our son, give him a place to start once he graduates from university,” she tells the BBC from her home in central China’s Henan province.

Guo and her husband – both in their late 60s – had to come up with more than $30,000 for the down payment and are already paying off the $811 monthly mortgage.

“That left us with less than $274 a month available to us, which is barely enough for basic needs. But we were prepared for that when we decided to buy.”

They also expected to take possession of a finished apartment, of course, at least one day or another.

Some buyers looked for help on Douyin, the Chinese version of TikTok or Weibo.

A man explains in a video that he has to work three jobs because he can’t move into his unfinished apartment – but he still has to pay the mortgage – and he has to continue renting.

In 2021, protests took place outside Evergrande headquarters in Shenzhen, in the south of the country.

At a more recent protest, disgruntled buyers chanted “the construction stops, the mortgage stops. Deliver the houses and get your money back!”

What frustrates and angers Guo is that she has no idea if the apartment will ever be delivered.

Guo says she was told she would receive the keys to her new apartment in December 2023.

“We saw the main frame being built and suddenly we heard that Evergrande was collapsing. Then construction stopped last year.

For years, China’s real estate sector has raised money for new projects by borrowing from banks, issuing bonds and selling new homes off-plan to buyers.

This business model has existed for a long time in many countries, but Chinese developers are over-leveraged, meaning they borrow too much money.

“A lot of them have become very aggressive,” says Sandra Chow, head of Asia-Pacific research at credit market analytics firm CreditSights.

“On the one hand, they issued bonds to foreign investors and then used the money raised to buy more land and expand their businesses.

“On the other hand, they have become very dependent on contractual sales [sur plan] to obtain funding. When the proceeds from contract sales stopped coming in, people stopped buying houses, it all started to unravel.”

Alicia Garcia-Herrero, chief economist for Asia at wealth management company Natixis, also sees structural problems in the sector.

“In my opinion, the whole thing was designed too easily for promoters,” she says.

“China has become accustomed to easy growth in the real estate sector. The numbers are staggering: a third of the country’s economic growth comes from the real estate sector. This sector has created jobs and wealth.

Mr Chow describes this situation as “a sort of chicken and egg scenario”.

“If you think, for example, about the amount of steel and cement it takes to construct a building, then the demand for white goods, furniture, lamps, etc. that people put in the apartments, the real estate sector has, indirectly, been a huge driver of the Chinese economy, particularly the manufacturing industry.

For Mr. Garcia-Herrero, this relative importance poses a problem: “China’s economic production or GDP is made up of one third infrastructure, one third manufacturing industry and one third real estate” .

“The US stock market is much larger than China’s. However, 20% of China’s listed assets are related to real estate, while in the US the figure is only 5%. . It is obvious that this sector is hypertrophied in China.”

After Evergrande, the debt problems of another giant – Country Garden – surfaced this year. It announced a record loss of $6.7 billion for the first six months of the year.

A Japanese investment bank estimates that the developer still has to complete one million homes.

“I almost bought an apartment in Country Garden,” said Zhang Ming, 31, from Henan. “This would have been my marital home. My boyfriend and I are getting married next March.

In China, as in many cultures, ownership of real estate is considered an essential prerequisite for marriage.

“My parents’ house was built by Country Garden – we were impressed and were told we could get a good discount in August.

But she changed her mind when she learned that Country Garden was on the verge of default, that is, failing to repay a debt.

The real estate crisis has seriously shaken the confidence of a large number of potential buyers – people like Zhang – in real estate investment.

“My parents’ generation experienced two decades of continuous rise in China’s real estate market. Today, people around me are all worried about the depreciation of real estate prices.

“We’re definitely not going to postpone our wedding because we didn’t buy a new house. I’m just going to have to let go of the ‘newlyweds living in a new house’ idea.”

Although official figures show that house prices have fallen only slightly in recent years, evidence on the ground suggests the reduction is more substantial.

“The financial wealth of Chinese households is concentrated in real estate, at around 80%,” explains Ms. Garcia-Herrero.

“When you see prices falling by 20%, even if it’s only on paper, you’re not going to consume if you feel like your financial wealth has suddenly been cut.”

Ms. Garcia-Herrero believes that if confidence in real estate declines, economic output will also decline.

Official figures for August show exports fell 14.5% in July from a year earlier, while imports fell 12.4%.

The unemployment rate among Chinese youth exceeded 20% in May.

All of this has reinforced fears of a further slowdown in the country’s economic growth this year, which in this interconnected world would have far-reaching effects.

According to a 2019 study by the US Federal Reserve, economists estimated that an 8.5% drop in Chinese GDP would lead to a 3.25% fall in advanced economies and almost 6% in emerging economies. .

Analysts recently lowered China’s growth forecast for 2023 to 4.5%.

“The question arises whether this is a new Lehman Brothers moment,” says Mr. Chow.

In 2008, Lehman Brothers, one of the largest investment banks in the United States, declared bankruptcy due to its exposure to bad loans related to mortgage loans, which contributed to a global recession massive.

However, Mr. Chow believes that China is better able to take action than the United States, “given the structure of the government [chinois] and the way things are implemented.

“We must not forget that the government has been planning to downsize the real estate sector for some time. Policy makers are realizing that some developers are far too aggressive, borrowing too much.”

Since 2019, Chinese President Xi Jinping has repeated a mantra that “housing is for living, not for speculating.”

Garcia-Herrero even sees a positive side to the bursting of the real estate bubble, because China exports a third of the world’s goods.

“Lower prices in China could slow inflation in a world fighting it.

“But let’s say they go wrong with Country Garden, a big bank goes bankrupt, no one makes a decision, and the loss of confidence turns into a massive financial crisis. If that were to happen, it would absolutely horrible for the global economy,” she warns.

Guo Tianran and many Evergrande buyers are not idle.

“We formed three WeChat groups, each with nearly 500 people. We organized to go to the government. There are so many of us that they can’t ignore it.”

“I used some of my retirement money for the down payment. We’ll be paying a mortgage for the next 30 years. We don’t want to be left with nothing.”

Guo tells the BBC that local authorities warned her not to speak to the media and that she was told construction work would resume.

A few members of his group go to the construction site every day to check, but they have only seen “a few workers” so far.

“Some of us have stopped paying the mortgage and if the bank insists too much, they will sleep in the bank lobby.