China's Housing Market May Never Recover

Editor's note: Global real estate is in trouble. Big real estate investors have started defaulting on their loans... and some operators have already gone bankrupt in the past year.

While U.S. real estate looks bad enough, it's nothing compared with the Chinese housing market. Today, we're revisiting our coverage of one of the largest Chinese housing developers and its credit troubles.

In this essay – updated from our October 25 edition – Joel Litman explains just how risky Chinese housing has gotten these days.

Once again, China's housing market hangs in the balance...

In September, massive Chinese property developer Country Garden (2007.HK) narrowly avoided defaulting on its debt.

It missed its initial payment window... and right as its 30-day grace period was running out, it paid $23 million to get lenders to back off.

Then, in October, Country Garden missed a $15 million coupon repayment on a U.S. dollar bond and officially defaulted.

Clearly, the company is barely scraping by. It's still around after defaulting... But these late interest payments are turning into a concerning pattern.

And things could get a lot worse...

By the end of 2022, Country Garden's outstanding liabilities totaled approximately 1.36 trillion yuan (about $187 billion). The Chinese real estate industry has been grappling with declining home sales and skyrocketing debt-refinancing charges.

And unfortunately, there doesn't seem to be a silver-bullet solution.

This is just another step in the parade of issues for Chinese real estate. As we'll discuss today, we expect more issues to arise in the sector... and those issues threaten to bring down China's whole economy.

As of August, China had 7 billion square feet worth of unsold homes...

That translates to an estimated 7 million-plus empty houses in the country today.

And if the real estate developers had their way, it would be an even bigger gap. That figure doesn't include projects that were planned but not completed because developers ran into cash-flow issues.

To address all those empty homes, the Chinese central bank is making it easier to buy real estate.

Folks used to have to put up 25% of the property's value for a down payment on a primary home. Some second-home purchases required a down payment as high as 80%.

Now, first homes only require a 20% down payment... and second homes require 30%.

And the first-home rate used to be exclusive to homebuyers who had never had a mortgage. Now, local governments can consider whether you're buying a primary residence or a secondary residence.

Unfortunately, these changes won't be enough to save Chinese real estate...

Developers are running out of people to sell to. Australia and New Zealand Banking Group estimates that all Chinese developers combined are about $8.5 trillion short of meeting their obligations.

And they spent all that money on a false hope... that China's population would keep growing forever.

I covered this issue in October at our corporate affiliate Stansberry Research's annual conference in Las Vegas.

Another presenter, geopolitical expert Peter Zeihan, pointed out that China's actual population may be overestimated by more than 100 million people.

And whether or not we'll ever know the true population, the developers were clearly building far more real estate than the country needed.

Developers paid for such excessive construction with debt. Now, they're starting to face reality. It's already spelling major challenges for China... and it will likely get worse from here.

When there are more homes than buyers, property prices plummet. As values drop, developers will struggle to recover their investments. More stories like Country Garden will start cropping up.

Of course, banks won't want to keep lending if these developers can't sell anything...

And while the government might not realize it, these new mortgage-easing practices might only make matters worse. They're pressuring citizens into taking riskier mortgages.

When folks put less cash down, their interest payments will be higher. They'll become a bigger burden on the public.

Such ripple effects in the real estate market – a key pillar of China's economy – could dampen consumer confidence and spending. It could be a big hit to the nation's overall economic stability.

The situation in Chinese real estate looks more dangerous by the day. There's too much housing and not enough people or demand for these properties.

This could very well be the beginning of a collapse in the Chinese real estate sector... and the economy will suffer. China isn't a safe place for your money right now.

Regards,

Joel Litman
December 28, 2023