China: Houses Are For Living Please

Shanghai by 褚 天成 /Unsplash

China’s real estate sector accounts for more than 25% of its economy, and with 8 out of the world's 10 most indebted developers hailing from the nation, officials are eyeing this as a threat to economic stability. 

Backstory

Long before the Evergrande crisis surfaced, Beijing was well aware of its real estate sector's overleveraging problem. 

Since August 2020, it began curbing real estate borrowing with the “three red lines” policy, which says that developers looking to refinance need to: 

• have a 70% ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract, 
• a 100% cap on net debt to equity, and 
• a cash-to-short-term borrowing ratio of at least 1.

Per this Aljazeera story , these curbs have contributed to a fall in new construction, housing sales and prices this year. 

Growth in real estate investment, which peaked at 38.3% in January, dropped to 21.6% in April, 10.9% in July, and 7.2% in October.

As Per Plan

This contraction in the real estate sector is however, quite in line with Beijing's expectations, which has indicated it will not deviate from its “houses are for living, not for speculation” campaign.

Vice Premier Liu He said officials should “focus on stabilising land prices, house prices, and stabilise expectations,” in order to “solve household’s housing problems and promote the healthy development of real-estate companies”.

Word On The Street

🎙 “There is the realisation that the former growth model – which involved high levels of debt, high levels of investment, and high levels of growth – doesn’t work anymore, and that it needs to shift to a more sustainable model, which means a slower pace of growth.” said Shehzad Qazi, MD, China Beige Book International.