Just like fashion magazine is a very young business in China (as mentioned in newsletter 78), property market is also a young business. Up until 1978, there was no privately owned house in China: everything belongs to the “gongjia” (public). The unit (publicly owned company) decides where you live. The advantage of it is that housing is free. But, you have no choice on what house you live. Housing quality is poor. It is very hard to change houses, as family grows bigger, the house becomes more crowded.
A reform was called for, just as everything else in China back then.
Slowly, the government experimented on establishing the property market and let people build, sell and buy homes. In the 1990s, no one in China really knew how this worked, but by 2005, China already had its own housing bubble, which deflated in 2012. As a result, abandoned real estate projects formed ghost cities in China. There is a long Wikipedia page on the housing bubble if you want to know more.
As everywhere else in the world, real estate is an attractive business if you are wealthy and well connected. In China, it is perhaps even more so, because land is government owned. To get the permission to build on any land, you need a government grant. And governments are not idiot: of course they sell the right to build. Selling land becomes the major source of revenue for local governments in China. And many people argue that this is one of the main reasons of overheated real estate market - local governments have all the incentives to make sure people continue to buy new homes. For example, if you have children, they can only go to the public schools near the home you own. If you rent, then your kids will have a very hard time to find a public school to go to. This government policy almost guaranteed that the demand for housing is always high.
After the last housing bubble burst, housing price continued to rise. That makes buying off-plan very attractive. But since 2020, the real estate market is going through another crisis, this time, developers are in trouble. They are those who are selling off-plan properties to Chinese people who found the off-plan deal attractive. Because they have foreign investors, you probably have heard about the current crisis, for example, Evergrande. (We mentionned in passing Evergrande in newsletters 4 and 60.)
In China, to buy an off-plan home, you need to put down 50% of the price and get a mortgage for the other 50%. And then, you wait for your home to be built. It was not rare that a building was not finished: then the buyers were left with debt and nothing else. It has been reported that in some of those unfinished buildings, owners just moved in and started living there, since they could not live anywhere else when they lost their income due to COVID. They have been paying their mortgage debt for 11 years when the building work stopped 8 years ago. There is no water or electricity in the building. But these people had nowhere else to live, after paying 11 years of their mortgage debt.
The risk of paying mortgage to get an unfinished building is not zero in China. But people still opt to buy off-plan homes. And it is not just because it is cheaper than finished homes. One possible reason is that, this time, the developers that went bust are the biggest ones that used to have good track record, such as Evergrande. People had faith in the system and in the credibility of the companies. Also, I speculate, because people were not so aware of the risk. Why? Because negative news were normally discouraged. If you are working hard trying your best to make the 50% down payment, you might not pay much attention to other people’s misery that is not on the front page of the newspaper. Even if they heard about it, they might think they were smarter and more careful.
But in China, as we have seen in the rural bank scam stories, one can never be careful enough.
Here is a story of a young couple. It is told in four pictures.
In the first picture, you see a very hopeful young couple, in their video, they happily claimed that they just bought a home for 1 million yuan (about 150,000 USD). They said, “We did not hesitate to buy the 1 million yuan home, but for a piece of chicken leg that costs just a few yuan, we thought about it for a long time. En, this is our new life, as housing-slaves.” They were very proud to be housing slaves. (“Housing slaves” are people who owe mortgage debt, as you can guess.)
In the second picture, you see the young woman happily standing in front of a row of buildings in construction. “Today we come to see our home again.”
In the third picture, they said, “It is the 12th floor now. We will come every month.”
In the last picture, they just heard that the developer Sunac went bust. Sunac was a major real estate developer in China and listed on the HKSE since 2010. It got delisted in April this year.
But this is not the end, they still have mortgage to pay. Because if they stop paying, the bank will tank their credit rating, which will ruin their life and possibly their children’s lives, if they dare to have any children.
This is absurd, but a reality that many Chinese people have accepted.
Until now.
On July 14th (hint hint), housing slaves in 22 cities refused to pay their mortgage debt on unfinished homes. According to Reuters, the new wave of unfinished buildings from top developers in China, is directly triggered by the “three red lines” policy imposed by our dear supreme leader. What the supreme leader wanted was to get investment resources out of property market and into other more “useful” markets. But it seems to have backfired.
Perhaps of all the equations in China’s property market, the most unexpected factor is the “housing slaves”, who have been swallowing the loss and stoically paying their monthly mortgage payment without a home to own. They are truly slaves. If any of them dare to rebel against the system, they can be easily crushed, now that the credit system is China is reigning in anyone who has a slight aspiration for a good life. That is, if they act alone.
How did this 22-cities collective action was pulled off under the forever watchful eyes of the big brother? Maybe we will know of the story one day. (If you want to hear the anger of those mortgage borrowers, you can watch this short video in Chinese.) For now, Beijing was caught by surprise. In a very rare move of compromise, they agree, for now, to put the mortgage payment on pause.
But China seems to be in a bigger trouble than just mortgage default: new home purchasing is down. People are losing faith in the system. Local governments are losing most of their income if they can not continue to sell land. And that is a big trouble because most local governments are already deep in debt, some are slashing paychecks to their employees.
But no worry, dear supreme leader will pull the country through, as he understands very well, one must never lose faith.
If you are a fan of Jackie Chan, there is some news about him: Jackie Chan’s Film Production Under Fire for Shooting in War-Torn Syria:
The action flick is aimed to glorify China’s growing role in international affairs, but some Syrian filmmakers have lambasted the production for profiteering from other people’s suffering and called it unethical.
I guess Jackie was jealous of the success of the movie series Wolf Warrior! Bit more on the JC produced movie ‘home operation’. In the meantime, his big brother and a few others are preparing Septet.