World News


No, China’s Property Bust is Not a ‘Lehman Moment’

The property sector in China is facing an unprecedented downturn. Property sales are projected to plummet by about 30% in 2022, as many of China’s largest developers face insolvency and protests break out across the country. On the surface, this property bust has all the trappings of a recession catalyst, and has been widely referred to as China’s “Lehman moment”— a reference to the Lehman Brothers collapse that marked the climax of the 2008 subprime mortgage crisis. But between heavy state intervention and largely isolated financial markets, the crisis is unlikely to have a significant impact on the world economy.

China arguably has the world’s most inflated real estate market, with home prices hovering around fifty times the average income in major cities like Beijing or Shanghai. By comparison, that ratio is more like ten in New York City and seventeen in London. For decades, real estate has been the most popular investment choice for China’s rapidly increasing urban middle class, as the stock market is commonly considered too risky and unpredictable. This, combined with zero property taxes, cheap credit, and the fact that China has one of the highest household savings rates in the world have fueled a speculative property-buying frenzy. Over 90% of households own their residences, usually with astronomical mortgages.

Real estate developers across China have taken advantage of this debt-fueled housing inflation by building up extremely high leverage. Evergrande, once the largest developer in the country, had over $300 billion in liabilities before its default in late 2021. Such developers would often lease rural land from local governments to build massive apartment buildings in the middle of nowhere. Even though very few people lived in these developments, they were still bought up by investors hoping to make money through appreciation, giving rise to virtually empty ghost cities.

All these speculative excesses have created a multi-trillion-dollar housing bubble, which seems to be in the process of bursting. Many of the largest Chinese property developers can no longer meet their debt obligations or finish their projects. As most properties are sold prior to completion in China, hundreds of thousands of frustrated buyers across the country have banded together and refused to pay the mortgage on these unfinished properties. Between developers that can’t pay their debts and customers that refuse to, banks are being pressed from both sides. All in all, an estimated trillion dollars in value has been wiped off the real estate sector.

However, unlike the 2008 U.S. housing crash, China’s current property crisis is unlikely to have significant global ramifications. China’s major banks are owned by the state, and thus will not be left to fail. The reserve ratio for these banks is widely expected to be imminently reduced, meaning hundreds of billions of yuan held idly in reserves will be instantly released to ease pressures. In addition, China’s markets are comparatively isolated, with less than 5% of Chinese equities and bonds held overseas. Although foreign creditors to property developers still face a sizable haircut, China’s minimal exposure will likely limit the broader effect on the global economy.

Moreover, China is still in the process of rapid urbanization. Millions of people move to cities every year, and they need a place to live. China’s massive gender imbalance — of about 35 million more men than women — has given rise to a cultural phenomenon of bachelors needing to own property as a social precondition to marriage. These factors remain major drivers of property demand, and they aren’t going anywhere.

All in all, while the short-term aftermath of the property crash is significant, China will not undergo a full-blown crisis. Even though the optics may appear to closely resemble the 2008 financial crisis, there are a number of key differences that will prevent a dire situation, and foreign spectators shouldn’t panic.