To what extent is Evergrande (恒大) responsible for the collapse of China’s housing market?
Heavy punishment of the market leader
On August 20, China sentenced the founder of the country’s biggest property developer Hui Ka-yan to life imprisonment, with political rights stripped for life. All personal assets were confiscated.
Hui pleaded guilty to large-scale financial fraud, asset embezzlement and corporate bribery, illegal fundraising and absorption of public deposits. The court also fined the Evergrande Group RMB15.82 billion or S$3 billion. A day later, the court accepted Evergrande’s liquidation petition.
This marks an important milestone of President Xi Jinping’s plan to bring down the big bosses of the real estate industry.
Who popped the housing market bubble?
The Chinese authority started tightening borrowing to cool the property market from mid-2017. This forced developers to issue bonds overseas. It was the time when any investment related to China or real estate were regarded as “hot”. The China property bubble quickly ballooned to $52 trillion.
In August 2020, President Xi imposed the three red lines on credit ratings:
1) Liability-to-asset ratio (excluding advance receipts) of less than 70 percent;
2) Net gearing ratio of less than 100 percent; and
3) Cash-to-short-term debt ratio of more than 1x.
“A dozen developers, including Shenzhen-based Evergrande and Vanke (developer of The Glades in Singapore), and Guangdong-based Country Garden (developer of Forest City and Danga Bay in Johor Bahru), were picked for a pilot scheme to submit three-year debt-reduction plans.”
– “What did deflation of China’s property bubble tell us“, PropertySoul.com
Most developers failed and were forbidden to borrow. The cashflow problem triggered the collapse of the real estate industry in 2021. By September 2023, 34 of top 50 developers defaulted on payments. It snowballed to over $150 billion defaults in offshore bonds.
(Read my earlier blog post “Who is to blame for China’s property crisis?“)
Reasons behind Evergrande founder’s sentencing
1) A response to the $150 billion defaulted bonds
Actually, Evergrande is not the only property developer in China that went on a spree of reckless borrowing. Other Chinese developers which defaulted and re-defaulted offshore and domestic bonds (names that Singaporeans are familiar with) include Country Garden, R&F, Vanke, Fantasia, Logan, Sunac and Shimao.
Five years after the crisis, recoveries of the property market and overdue payments are nowhere in sight. Hui’s sentencing is to show the creditors that the Chinese authority is doing their job.
2) Kill the chicken to scare the monkeys
Obviously, Hui’s high-profile sentencing is an example to warn other influential entrepreneurs and tycoons in the country. Despite their high industry status and huge personal wealth, they could lose everything overnight. Besides, heavy fines and asset seizures could boost China’s national fiscal revenue.
The question is: After Evergrande, who’s next?
3) A scapegoat for a nation’s shattered housing dream
The collapse of China’s housing market left over 1.5 million homebuyers stranded with unfinished properties. It also triggered a domino effect across the country’s financial system.
Property agency Centaline (中原地產) reported 36% to 44% plunge in housing prices from the peak in 2021 in tier 1 cities . In fact, an agent in Guangzhou told me some overpriced new projects have slashed their prices up to 50% or 70%.
Sadly, many homebuyers and investors felt cheated after losing their hard-earned money and lifetime savings. Young people choose to “lie flat” and refuse to buy any home. The Chinese culture of owning a roof over one’s head is gone from this generation. The hope of finding the next buyer for one’s current home is dim.
Someone needs to pay for the country’s shattered home ownership scheme. The life sentence of Evergrande’s founder went beyond enforcing statutory law. It is the government’s way to address widespread discontent and pacify public anger.
Australia housing in a new bear market
Australia property is entering a bear market after consecutive interest rate hikes and investor tax changes. Buyer confidence is at all-time low.
In the second quarter, house prices fell 2.9% to 3.2% in Sydney and 2.5% to 3.1% in Melbourne . For the whole year of 20226, forecasts expect prices to drop between 6% and 10% in Sydney and between 7% and 10% in Melbourne.
The average value of a Sydney home dived by almost A$100,000 (S$91,000) since the peak this February. Through the Australian winter, homeowners of almost every suburb suffered from falling property values, with a median of A$40,000 (S$36,000) wiped out from their home value.
As high as 45% first-time buyers regretted overpaying for their homes during the 2021 property boom. They were angry about being misled into buying overvalued properties under the mask of low interest rates at that time.
The earlier generations are no better. They live in a house inflated in value but are cash-poor in face of high inflation. Now they are afraid that they cannot even offload their overvalued homes that are unaffordable to the young generation.
(The above is a repost from my facebook page fb.com/propertysoulblog)
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