There are analyses suggesting that China's real estate market is about to enter a state of decline. For the first time in Chinese history, there is growing anxiety among the Chinese people that no matter how many stimulus measures the government implements, the real estate market will not recover. Now, can you guess which city is the most difficult in the world to buy a home? Many might think of New York or London, or even Seoul. However, the number one city in the world where it is hardest to secure a home is actually Shanghai, China. In China, it is said that one could spend 50 years without saving a penny and still not be able to buy a house in Shanghai. This ranking comes from the global database website Numbeo, which measures the price-to-income ratio (PIR). The PIR is a metric that expresses the duration a household needs to save in order to purchase a home based on the ratio of housing prices to household income. We often hear that housing prices in our country are extremely high.

However, in our country, Seoul ranks in the middle at 20. It is said that one would need to work for 27.7 years without spending a single penny in order to buy a house. In contrast, in Shanghai, it takes 50 years, which means that housing prices are incredibly high. Currently, there is a significant increase in housing listings in Shanghai, reportedly up by 82% over the past five months. This trend is leading to a gradual decline in housing prices, and there are analyses suggesting that China's real estate market may soon enter a death spiral. 

Recently, this analysis has gained traction for various reasons. China's largest real estate company, Wanda Group, faced a default crisis, and prior to that, the Hong Kong group also suffered losses. So, how did the once-thriving Chinese real estate market end up in such a difficult situation? I will explain this step by step. First of all, the current situation in China is not looking very good.

In the last session, I explained that China's growth engine was, in fact, lost during the global financial crisis in 2008. Especially in the early 2010s, there was a crisis where China almost fell into the middle-income trap. The middle-income trap refers to a phenomenon where a developing country experiences smooth growth in the early stages of economic development but then becomes stuck in a prolonged stagnation between developed and developing countries. To avoid falling into this middle-income trap, China adopted several measures. The first was the astronomical debt I mentioned last time, and the second was real estate. Real estate has played an enormous role in the Chinese economy, and there are two main reasons for this. The first reason is that real estate itself has a tremendous stimulative effect on the economy. Just think about the process of building a house.

Construction labor is used extensively. Once you move in, you also need to do new interior work and buy new appliances and furniture. Therefore, when real estate development is promoted, it leads to increased consumption, which revitalizes the economy. 

The second reason is that the more active the real estate market is, the more taxes the Chinese government, especially local governments, can collect. This part has a very unique characteristic specific to the Chinese real estate market. In China, large-scale land is leased to land development companies for a fee, allowing for long-term leases. This is essentially local governments engaging in land sales, using it to gather economic development resources for the local economy. This is possible because China is a socialist country, where private land ownership has never been allowed. Therefore, in the case of residential land, the government leases it for up to 70 years.

The land use fees generated during the process are truly enormous, accounting for as much as 40% of local government revenue during the good economic times in China in 2019. With the money earned in this way, local governments have supported large-scale equipment investments, provided subsidies to private enterprises, and invested in various types of infrastructure, driving China's economic growth. As housing prices rise, tax revenues increase, and in this process, China has been able to achieve economic growth, which is why the Chinese government has allowed housing prices to soar. Through this real estate boom, the Chinese government has effectively escaped the middle-income trap and continued to maintain high growth. The problem is that the side effects have become quite severe. Initially, it seemed good as the economic growth rate increased and the economic pie grew larger. However, the skyrocketing housing prices resulting from real estate stimulus measures have revealed contradictions within the economy, especially...

The collapse of the skilled generation has begun. As housing prices skyrocket, young people in China are unable to secure homes, leading to a sharp decline not only in marriage rates but also in birth rates. In our country, we have a similar phenomenon known as the gyeongjok, and in China, there has been a rapid increase in the park generation. In other words, marriage has become frightening. When we look at the actual figures, in China, the number of marriages reached about 12 million pairs in 2013, but last year it plummeted to 7 million pairs. Just think about it. As I mentioned earlier, even with our country's PIR index being only half of that, many people are postponing marriage due to excessively high housing prices. Just imagine how severe it must be in China. Historically, China has viewed its population as a measure of national strength. President Xi Jinping has taken measures to prevent the decline in population since 2021.

Strong real estate regulations are being implemented. However, the regulations that started at this time have turned into a storm in the real estate market. Originally, China had been controlling housing prices through a strategy of push and pull. When housing prices rose too high, they introduced regulatory measures, and when prices stabilized, they implemented stimulus policies to drive prices back up. This time, it was expected that they could still adjust housing prices as they pleased, in line with the government's preferences. However, after prices were stabilized and stimulus measures were reintroduced, housing prices continued to plummet even into 2022. In a desperate move, the Chinese government introduced unprecedented stimulus measures, prompting citizens to invest heavily in real estate. As a result, there was a brief surge in housing prices in the first quarter of 2023. Just when it seemed that the real estate issues were resolved, housing prices began to decline again in June, and transaction volumes froze completely. Given the situation,

For the first time in Chinese history, there is a growing sense of anxiety among the Chinese people that no matter how much stimulus the Chinese government implements, the real estate market will not recover. There are three main reasons why the government's stimulus measures have become ineffective. The first is the difference in growth rates; the second is the decrease in population in major cities; and the third is the collapse of income foundations for the younger generation, along with the disappearance of wealth accumulation methods. The youth unemployment rate in China continues to hit record highs, reaching 21.3% in June. The older generation had ample opportunities to accumulate wealth during the past housing price surges, but the current Chinese youth are unable to find jobs, thus missing out on these opportunities. If the real estate market in China does not recover, the numerous vacant houses within the country will become a significant problem.

It has become inevitable that, according to estimates from CNN in the United States, the number of vacant homes in China could reach as many as 100 million. This statistic has been reported, yet the Chinese government does not release statistics on the number of vacant homes and has been unable to refute CNN's report. Therefore, while this figure may not be 100% certain, it is a well-known fact that there are indeed a significant number of vacant homes in China. This is largely due to speculative forces that have purchased many homes without occupying them. Until now, continuous high growth and population increases allowed a greater number of young people to purchase homes that the older generation was selling at high prices. However, young people in China are currently facing lower incomes and uncertain employment prospects, making it truly impossible for them to buy these vacant homes at high prices. In comparison to our country, we do not necessarily need to engage in transactions; we can opt for renting or leasing.

China has many cases where homes are left vacant instead of being rented out due to the characteristics of the housing market. Eventually, these homes will have to be sold. If the Chinese real estate market does not recover as it is, the numerous vacant homes in China could become a significant headache. However, we should not view the Chinese economy solely from a capitalist perspective. The Chinese financial market is completely controlled by the government. Therefore, even if immediate problems arise in the financial market, there is a possibility that a crisis can be averted. Nevertheless, given that China has relied heavily on the real estate market for its rapid growth, if the real estate market falters, it would not be an exaggeration to say that China’s growth myth may be at a turning point. Today, I introduced you to the Chinese real estate market, and next time, I will provide more insights.

I will share useful information with you.

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