Across China, hundreds of thousands of homeowners are refusing to pay their mortgages on pre-sold properties. The reason? China’s property market has tumbled into a massive depression and developers are now unable to continue building the homes that they have already sold.
For years, China has operated on a “pre-sales” system where buyers pay in full for properties that haven’t yet been built. This system worked well when business was booming, as the real estate market at its height accounted for roughly 25% of the country’s GDP. Over this time period, real estate prices skyrocketed and became unaffordable for much of the middle class as developers took on massive amounts of debt in order to meet production demands.
In August 2020, the government stepped in with the goal of slowly deflating the developing housing bubble before it could burst. They implemented a strict “three red lines” policy in which real estate developers had to meet three criteria in order to be able to borrow money. As it turned out, the major developers in China were all operating outside of those bounds and were left unable to borrow money, meaning they were left without enough cash to complete the building projects that had already begun. Now, prices have plummeted 30% from this point last year and homeowners in nearly 100 cities across the country are defaulting on their mortgage payments.
Many have voiced concerns over whether a crash in the property market of the world’s second-largest economy could have disastrous effects similar to those seen in the Great Recession. However, experts suggest that since Chinese developers hold only small amounts of overseas debt, the global economy is not at risk of a collapse. Despite this, the insufficient consumer demand in China—which comes as a result of both the property market failure and strict Covid-19 policy—could mean years of economic stagnation for the global giant. Considering the World Economic Forum estimates that every 1% decline in Chinese GDP results in a 0.3% reduction in global GDP, what happens in China over the coming months is worth keeping an eye on.