Occasionally, I get a feeling that global financial markets get strongly worried about Chinese real estate markets – real estate markets that indeed are not very transparent. Most of the time, however, these worries still seem to be suppressed too much on global financial markets. In my view, the current real estate crisis may be much more serious than usually understood by many/most Western analysts.
So much has gone wrong in the real estate market
The share of real estate amounted in the past decade on average to 7-8 % of GDP. But it should not be forgotten that the total real estate sector runs up to 25 percent of GDP or somewhat more when all services and other activities linked to the real estate sector are included. Different percentage numbers can be found as well since real estate statistics in China most probably have substantial shortcomings.
To clarify further the dimension of the real estate crisis: Apartment prices have come down sharply more recently, up to 100 million apartments are empty and many of their developers and owners have lost a fortune. Personally, I would not apply changes of official apartment prices since price downturns may be much higher in reality than in official statistics.
A brief remark: Already 10-15 years ago, I could see huge empty apartment units in Chinese metropolitan cities without light in dark evenings (which – by the way – shows that human eyes sometimes can give or receive better information than screens).
A major problem for private apartment owners is also that buyers of apartments usually have to borrow money even before the start of their own residential project.
Real estate is by far the biggest single Chinese contributor to GDP and has therefore also importance for global GDP growth. We already know that real estate companies have come increasingly under pressure. This may or will affect negatively both banks/non-banks and the financial situation of municipalities – the latter now losing a lot of tax income from shrinking sales of real estate.
Furthermore, the real estate crisis in China also means increasing social challenges in a country where apartment ownership functions as a kind of necessary private pension, and where the difficult demography outlook indicates that total future need of apartment areas looks quite limited in a macro sense, particularly when youth unemployment – also for academics – will dampen demand at least for some time.
Yes, China is currently sliding more and more into a critical situation – very worrisome for the whole (financial) world!
Affiliate Professor at the School of Business and Economics, Linnaeus University