Analysis by NS: China’s real estate bust is exaggerated

Most prices are down but at least in major cities thus far it’s hardly a meltdown

View from China with an Austrian School of Economics Perspective

People will misinterpret this and give inaccurate takes. I am no real estate mogul, nor do I work in finance. However, I did buy-sell and then buy a property in China – one in Beijing and one in Qingdao, and I now live in that place in Qingdao. So I know a liiiiittle bit more than your average Twitter shitposter, and do have a liiiiitle bit more insight into the China real estate market then even some legit real estate/finance expert in, say, the United States.

BTW, not to brag, but I did really well and executed almost perfect timing.

So let's go.... Is real estate in China expensive?

Yes. It is objectively expensive, ‘nothing fancy’ 2-bed apartments in Beijing and Shanghai will easily go for a million dollars or more. However, on a per square basis all things being equal (location), it is still cheaper than places like New York and San Francisco, even than Boston, Paris, London or Helsinki. But then INCOMES in China are much lower in absolute terms. Somebody doing really well in Beijing or Shanghai for example, a white collar yuppie working in IT or finance on the way, maybe a director, might make max $100K USD / year. Of course the equivalent of that in San Francisco and New York makes $200K - $300K. So we can do some metrics, but overall, yes, real estate in China is expensive. Of course, if you make less, you can go further out, maybe buy an apartment for $200K (there are good subways in China), but then your commute is an hour there and an hour back. It's like everywhere.

For a lot of people looking to buy a home this drop in prices is welcome!

Declines in real estate prices by city in the period from Nov 2018 to Mar 2023

Is there bad news? Yes. The news is bad for speculators: people who buy/sell apartments to make money, not to live in them. There are two kinds of people here: individuals and developers. Individuals are actually in less trouble. They may not end up getting rich quick, but they will be able to rent out their investment properties and likely cover the mortgage payments.

Unlike the US, there is no subprime in China, nobody gets into a million dollar home with $2000 down. You have to put 30% down, and in some cases more. Interest rates in China are still low (no inflation) and are indeed going DOWN. Mortgages are not going up. For most people, if they rent out the place it will pretty much cover the mortgage (it's what my investment property in Beijing did for a decade). Most people should be able to rent out their place: are you kidding? China is a place with 1.4 billion people and a couple hundred million still live in shacks. Rents will come down a little bit, but most people will still be able to rent it out. So that's not really a big problem.

The big problem is with the developers. They are the people who build these apartment complexes. They have the price rise BAKED into their business plans. They borrow extraordinary amounts of money from banks, in some cases tens of billions of dollars, to build entire cities. The price they build into their financial revenue projections assumes price rises. They even go conservative: 5% raise per year (some of these projects take 10 years). And then prices in China went up 10%-15% up per year. My place in Beijing went up 4x in 10 years. So these developers did great. But when prices drop.... suddenly.... their whole financial model collapses. Not only can they not pay their loan payments to banks, but they can't even pay their constructions workers or concrete or glass suppliers. The projects grind to a halt. Of course people have put down payments on these apartments. Projects are supposed to finish by a certain date, and if they don't the developer has to pay penalties: "I thought I was going to move in by 2024, now I have to rent for two more years, who is paying for that", etc. A nightmare.

So a big mess. Now, you can be sure that the Chinese government will step in and resolve the situation. This is not because it is a ‘communist’ government, but because this is what governments do. The US government did the same thing in 2008: it bailed out Fannie Mae and Freddie Mac. The Chinese government will bail out some and/or permit banks give more loans to these developers even though they missed their payments. I expect them to be a lot harsher on these companies too than the US is on failed banks and creditors. Remember they made the CEO of Evergrande liquidate most of his billions of dollars wealth first to pay off corporate debts before the government covered the rest.

Nobody is going to lose all their money.  Some people will have to wait longer for their apartment. Some may get refunds. And anyone who was buying for speculation is probably not going to do very well. There will be some protests sure. But no individual is going to lose everything and be out of the money he paid.

There is a knock-on effect on this. When people and developers were making money on their apartments, they spent like crazy. They bought cars, big screen TVs, they went on vacations to Hainan and safaris in Xinjiang, they had mistresses for whom they bought LV bags, etc etc. Now there is going to be a bit less of that. It's not going to go away completely, but there is going to be less of it. Which means that less spending will effect a whole bunch of other industries.

BTW, this 15% drop actually ain't that bad. In 2009 real estate in Beijing dropped almost 50% (that's when I bought 😉) There have been several 50% drops in various markets over the years. China's real estate market is not a monolith. It is a collection of many, many markets. Tongzhou in Beijing for example, you've never heard of it, prices there have crashed 50% at least twice between 2008 and today. There are areas in Changsha and Yunnan that have seen a crash > 50% that I am aware of (know people from there who told me). So 15% drop is nothing. Especially considering that from 2015-2020 in big cities prices went up probably DOUBLE. Just in those 5 years. So if you have something go from 100 to 200 and then drops 15% that is how much? You can leave the correct answer in the comments. So it depends on when you bought. Kind of like stocks. If you bought at 100 well then you're still ok. If you bought at 200, well then... you might be in trouble. But only if you bought to speculate. If you are going to live in it for the rest of your life (like me in this place in Qingdao) who cares.

Addendum: By contrast, prices in rural areas and small cities have in many cases fallen by more. Hebi City in Henan province made headlines earlier this year when prices fell under 1,000 RMB per square meter in some areas. However, even in Hebi such low prices were never across the board. Some areas in Hebi are still selling in the 4-5,000 RMB range… at least in theory.

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