China’s property crisis claims more victims: companies
THE FORECLOSURE and court auction of 87 flats in the southern city of Changsha last month underlines many of the problems with China’s property sector. The homes were owned by one woman, flouting the controls that Changsha and other cities have on the number of housing units urban dwellers can buy. The fact that one person was able to acquire so many highlights the backroom dealings that occur frequently. In the past, such speculative activity helped drive up prices and make China’s big cities some of the world’s most unaffordable. The situation, which is under investigation, also shows how rich Chinese often have had few investment options other than apartments. And even these investments now seem shoddy: most of the homes being auctioned in Changsha have gone unsold.
China’s leaders face seemingly endless property-related problems. But foreclosures have drawn little attention in recent years. This is surprising, given their importance as a gauge of the geography and severity of property busts. Evictions of those who couldn’t pay their mortgage became the central focus of the real-estate crisis that erupted in America in 2007.
In China, foreclosures have been rising rapidly. Courts foreclosed on nearly 800,000 properties in 2023, according to an estimate from Enhance International, a consultancy. That is an increase of more than 50% on 2020, when new rules were brought in to cool the overheating market. The government does not publish official data but another estimate shows a year-on-year increase of 12% in the first half of 2024, with rises of over 40% in several large cities. Fuzhou, in China’s south-east, notched up a 63% increase in foreclosures in the first half of the year.
As courts put these properties under the hammer, fewer and fewer are selling. Enhance reports that just 15% of foreclosed and auctioned homes found buyers last year, down from around 25% in 2019. This is despite an average discount of around 33%, according to state media.
If each foreclosure meant another family getting booted out of a home, China’s property crisis would be causing dramatic social instability, as America’s did after 2007. But the foreclosure wave in China is different. Household foreclosures have been kept to a minimum. Many banks are giving buyers extensions on mortgage payments or lowering interest rates. City officials worry about foreclosures causing homelessness. Whereas local courts once took less than three months to rule on foreclosure cases, this year many have chosen to delay filing cases for at least six months to give buyers time to catch up.
So whose homes are being repossessed? In China the main holders of properties subject to foreclosure are not households but companies. Just like average punters, firms in China often struggle to find good investments and therefore plough cash into commercial and residential property. They also frequently mortgage properties they own for bank loans, as the analysts at Enhance note. Local media reports suggest that the cluster of homes owned by the woman in Changsha were connected to a company she controls.
Rising foreclosures are evidence that China’s companies face a “balance-sheet recession”—debt so high that their spending is reserved for paying down debts instead of making investments. Net bank lending turned negative in July for the first time since 2005 as corporate borrowing cooled and households repaid loans early.
Chinese officials may have avoided a wave of household evictions similar to that experienced in America more than a decade ago. But they should also fear the rising distress among companies. ■
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