China, UK & USA – Are We in a Property Bubble?


The United Kingdom

Analysts have called the peak of the property boom in apace, the risk of a more dramatic correction is growing.” But the affordability crunch is hitting buyers on the bottom rungs of the housing ladder hard. Analysts warned the boom would cool fast as the cost-of-living crisis sets in.

Robert Gardner, of Nationwide, said: “We still think that the housing market is likely to slow in the quarters ahead. The squeeze on household incomes is set to intensify, with inflation expected to rise further, perhaps reaching double digits in the quarters ahead if global energy prices remain high.”

United States of America

As we all know, millennials are the most economically cursed generation. Now that they’re hitting their 30s and 40s, they’re not even cool anymore. And the housing market might be about to kick them where it hurts once again. Millennials are finally buying houses after years of being side-lined by such catastrophes as the dot-com bubble bust, Sept 11th, two long geopolitical wars, the housing financial crisis and its jobless recovery, and a global pandemic (phew!).

But, what if it’s actually just another trap for the broke generation? Americans think this is the worst time ever to buy a house, according to a recent poll. Interest rates are rising, and housing affordability is approaching rock-bottom whilst rents are rising.

Federal (national) debt topped $30 trillion in Feb 2022. Any increase in interest rates raises the level of debt and interest payments to become unmanageable very quickly. These huge increases of debt to income (GDP) cannot be sustained. Add to this heady mix, increasing high inflation, stagnant growth, devaluing currencies, Russia-Ukraine war and constant COVID fears of more lockdowns! – and we haven’t even mentioned the state of the economy in China.

China’s Property Boom – Evergrande Group

China v the USA

China can build a hospital in 10 days, with a 2nd hospital almost completed, while it took the city of San Francisco 10 years to approve a new bus route! California has spent 20 years planning a rail network whereas China has spent 20 years building the largest rail network in the world!

China – Real Estate

For nearly 25 years China enjoyed a huge property boom as Chinese workers migrated from the suburbs to the inner-city factories as global demand for cheap consumerism kept rising in line with increasing foreign wealth. All these workers needed city apartments which needed to be built. So, in 1997/98 The Evergrande Group began building not only apartment blocks but entire cities to house the mass influx of workers. With domestic and foreign financial banks/institutions eager and willing to finance the projects The Evergrande Group grew from nothing to over $150 billion in just 10 years! The biggest, fastest ever rise of a Chinese company. Chinese workers raced to own their new, as yet unbuilt apartments, paying deposits whilst many paid in full with the support and backing from the Chinese government. During the 2008 financial crisis, China stimulated its economy with 4 trillion yuan, giving access to cheap and easy credit. Evergrande seized the opportunity and translated its land holdings into collateral for further financing, then acquired more land, more collateral, more financing and so the cycle kept repeating ad infinitum because no one believed that the Chinese government would ever allow their domestic property market to crash without intervention – Therefore, debt-fuelled rapid expansion! Fast forward to 2015 and Evergrande is the largest property developer in China by sales!

When Debt Becomes Unsustainable

Then at about the same time (2015/16) the economic sentiment in China completely shifted 180 degrees so that reducing national debt became governmental, fiscal policy. Not only did China accumulate huge debt but how quickly that debt was accumulated was a real concern. So, inevitably Evergrande became illiquid. We not only had half-built and empty apartment blocks but whole cities, newly built bridges and roads which lead to nowhere. China’s real estate sector accounts for about 30% of the country’s US dollar-denominated bonds. Then in 2020, the Chinese authorities drafted the ’3 red lines’ metric which all developers would have to meet for further loans. Of China’s 30 largest property developers 14 had breached at least one of the new metrics. In September 2021 Evergrande ran out of money and faced a liquidity scare. They finally defaulted on 9th December 2021 getting very, very close to a debt restructuring programme. Meanwhile, the governor of China’s central bank announced that they would not bail out Evergrande. A group of Evergrande’s offshore bondholders said in a 20th January statement that the developer has failed to

substantively engage with them about restructuring efforts and the group will “seriously consider enforcement actions”. Then in a 24th January statement, Evergrande posted on its website that it is currently drafting a detailed restructuring plan. The company urged patience with the offshore bondholders. Two days later on 26th January, they announced a preliminary restructuring in six months’ time. According to Refinitiv Data, real estate developers in China have a huge $117 billion worth of debt maturing in 2022. Beijing has resorted to ‘pushing’ state-backed property developers and government-owned companies to buy some of Evergrande’s assets.

Final Thoughts

Dr Marco Metzler from Deutsche Markt Screening Agentur (DMSA) warned that the collapse of the company (Evergrande Group) could spark the crash of the World Financial Market. He told The Express: “This is the first domino of the collapse of the market. It will be even worse than the 2008 financial crash. The market is much bigger than the American market.

Ninety million people could be housed in China’s empty properties.

A collapse of Evergrande will have a huge impact on the job market as they employ over 200,000 staff and hire 3.8 million people every year for project developments.

Is The Evergrande Group the catalyst for the inevitable collapse of the Chinese financial system? Evergrande owes over $300 billion – to banks and non-bank financial institutions (remember Blackrock?), domestic and international bondholders, suppliers and apartment buyers. It has bank borrowings of $90 billion, including to Agricultural Bank of China, China Minsheng Banking Corporation and China CITIC Bank Corporation. (reports have 128 banks with exposure). Thousands of suppliers are on the hook for $100 billion. Evergrande has 1,300 projects in over 280 cities.

Who said, “Safe as Houses?!”

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