How China’s Property Bubble Burst

• Desperate property developers in China have resorted to gifts like new cars, free parking spaces, phones, and other consumer goods to attract homebuyers and boost flagging sales. These incentives are just the tip of the iceberg in a crisis involving hundreds of billions of dollars in home builder debt, trillions in local government debt, and at least a billion empty apartments.
• However, this wasn’t always the case. Since China’s economic liberalization in the 1970s and housing reforms in the late 1980s, locals have flocked to properties as the investment vehicle of choice over alternatives such as the stock market.
• The property and construction boom helped fuel China’s – and the world’s – economic growth for 30 years. By some estimates, property in China was worth US$60T at its peak, making it the biggest asset class in the world. Developers like Evergrandeand Country Garden got extremely rich in the process.
• China’s president, Xi Jinping, was against the fact that China’s real estate market was seen more as a place for speculation than for living. Government Policy began to change surrounding real estate. Namely, the “Three Red Lines” policy came into effect in 2020. This allowed the government to effectively cap the amount of debt property developers could borrow.
• Major market movers like Evergrande and Country Garden did not meet the criteria and thus stopped getting additional funding to finish constructions that were in progress. Additionally, urbanization began to dwindle and the demand for these properties fell as China’s youth population was facing a job crisis, and once the pandemic hit China, it exacerbated conditions. This pushed the housing cost-to-income ratio to historical highs and named it one of the worst in the world. As a result, supply massively overshot demand as affordability was at a low, causing the property bubble to deflate.

(Source: CNBC)