Stringent property controls enacted by the regime to slow the growth of real estate prices are causing developers to flee in China, while others are committing suicide as they find themselves unable to pay off debts. A debt crisis in the real estate industry would have massive repercussions for the Chinese economy.
The property control policies have been implemented over the last 18 months. Estimates say that one-third of real estate developers in Beijing simply left town without paying the enormous debts they had accumulated.
Real estate prices have been at the heart of China’s growth trajectory over the last decade in particular, and the measures a year and a half ago were an attempt by the Chinese Communist Party (CCP) to slowly deflate the real estate bubble, rather than have it burst. Last November was the “winter” for the industry, according to Nie Meisheng, president of the China Real Estate Chamber of Commerce.
“Quite a few real estate owners disappeared. Some chose to commit suicide because they could not afford to repay the huge amount of debt,” a person who works in the real estate industry in Beijing recently told The Epoch Times. He asked to remain anonymous because of the political sensitivity of the topic.
Developers borrowed large sums when monetary conditions were lax. As soon as banks tightened their lending standards, the real estate market turned and developers could not complete projects due to lack of funding and rising costs. Because many developments could not be sold to end customers at break-even, developers also had no way to pay back the loans.
“Whether it’s a major developer or smaller ones, the heavy pressure of loan interest is insurmountable; one-third of real estate developers in Beijing abscond,” the industry participant said.
Developers need to generate a certain amount of cash flow to meet interest payments; failure to sell or rent properties means they have no money.
The situation elsewhere in China is not much better. Three real estate developers in Hefei, Anhui Province, went missing, the Southern Weekend reported last November.
The real estate bubble resulted in other problems, too. The biggest being the vacancy rate, according to Nie Meisheng, who spoke about the topic at a real estate forum in Hainan Province earlier this year.
A survey by China’s State Grid Corporation in 2010 found that electricity meters in 65 million urban apartments and houses registered zero usage; that figure was about 30 percent of the market by dollar value.
Although some have challenged the data in the survey, a 100-day investigation by Beijing police in March indicated that there were 3.8 million vacant houses in the city. At an estimate of three people per house, these empty properties could hold over 11 million people, according to Beijing News.
Gan Li, the director of the Survey and Research Center for China Household Finance and a professor of economics at Texas A&M University, warned that Chinese household financing was stretched and at risk of forming a bubble, in an interview with Southern Metropolis Daily on Sept. 3.
“One-third of the developers meet the needs of all people in terms of capacity now. So two-thirds of the developers will collapse.”