You have to arrive at night in Shaoguan, a city of 3.3 million people in southeast China, to measure the real estate crisis that has hit the country. Around the high-speed train station, inaugurated in 2019, tower blocks of buildings have sprung up like mushrooms in recent years, creating a gigantic neighborhood.
But when night falls, not a single light is on.
That’s because Shaoguan is drowning in empty and unsold apartments. At the current sales pace, it will take more than 10 years to sell this stock, compared to an average of two years in China, according to estimates by the China Real Estate Information Corporation. This is a record in the country, which has 28,000 billion yuan ($3.96 billion) worth of available apartments, according to Barclays.
“There are so many apartments, you can buy whichever one you want,” Deng, a taxi driver, says jokingly.
A free range hood
Still, developers on site are doing everything they can to convince potential buyers. Huge red billboards on the tops of the buildings under construction announce in large letters “Buy this year, move in next year!”
At the Light of the New City residence, by the developer Country Garden, the purchase of a large three-room apartment comes with an additional 96.8 square feet for free. Buyers are also entitled to a free range hood. But nothing seems to be working.
On this Friday at the end of September, the residence’s showroom — complete with a gigantic model of the building complex — is empty. Two real estate agents are killing time.
“Country Garden has laid off half of its staff in Shaoguan,” one of them says. Further into the city, the showroom doors of the Baoli Metropolis residence, are closed with a large padlock.
Prices down by 8%
Shaoguan, in the southeast Guangdong province, is symptomatic of the real estate crisis much of China has been experiencing since 2021. The crisis is hitting small and medium-sized Chinese cities the hardest, including in the wealthy province of Guangdong — the birthplace of developers Evergrande (currently in liquidation) and Country Garden.
Lacking strong industries that could generate growth and tax revenue, these so-called 3rd and 4th-tier cities have traditionally financed themselves by selling their land to real estate developers. These developers overbuilt, creating a supply far greater than real demand in these unattractive cities that are struggling to pivot to new industries.
Shaoguan, for example, is struggling to attract talent as the province’s capital city Guangzhou is only an hour away by high-speed train. Salaries are relatively low compared to real estate prices and good jobs are becoming scarce. All of these factors have driven demand for housing down.
“In China, Tier 3 and 4 cities take more than 60% of the country’s new building land each year, which is excessive compared to the demographic slowdown they are experiencing,” says Xie Yifeng, president of the China Urban Real Estate Research Institute.
While real estate in Shanghai has remained stable (+0.8% in September), the price of new apartments fell by 8.3% in Shaoguan over the same period, according to real estate platform Anjuke. One square meter (10.7 square feet) is now worth only 5,590 yuan ($790) on average, while some apartments start at 4,000 yuan or 5,000 yuan per meter.
“It’s really cheaper than 10 years ago,” says a real estate agent at the Junyue residence, which is owned by Evergrande.
70% of Chinese savings in real estate
This isn’t the first time that China has experienced a real estate crisis. The sector, which has been the driving force of the entire Chinese economy, already had some difficulties in 2009 (following the Lehman Brothers’ collapse), 2012 and 2014-2015.
But the real estate crisis that has been shaking the country since 2021 is one of the worst. That is because the Chinese population is declining, urbanization has reached a peak and Chinese people are more indebted. Lured by ever-rising prices during years of real estate speculation, Chinese households have invested around 70% of their savings in real estate, compared to 25% for Americans.
This most recent crisis started in the summer of 2020, when Beijing burst the bubble by radically restricting access to credit for large developers that were too heavily indebted. Since then, 70% of Chinese developers with U.S. dollar bonds have defaulted, according to Barclays.
As a result, many construction projects came to a halt, causing prices to plummet and Chinese property values with them. More than $18 trillion in real estate assets have evaporated: “The equivalent of every Chinese family of three having lost some $60,000 in assets since 2021,” Barclays notes.
After a first attempt in May, Chinese authorities recently announced new measures to support the real estate market, as part of broader monetary easing. The interest rate on existing loans will be reduced to that of new loans. The down payment rates have been cut from 25% to 15% of the value of the property and restrictions on purchases will also be lifted in Guangzhou, Shanghai, Beijing, Shenyang and Shenzhen, where certain conditions had to be met.
Reforming the market
As for “small” cities like Shaoguan, China recently promised to better control the supply of new housing and to “optimize” land use, as part of a “new development model” for real estate. Although no concrete measures have been announced, Xie sees this as a turning point.
“This is the first time that the central government has spoken publicly about land management,” the expert says.
In May, China’s central bank earmarked 500 billion yuan ($42 billion) in credit for state-owned companies, so that they could buy back unsold apartments from developers and turn them into affordable housing. But that funding represented only 2% of the unsold apartment stock by value, according to Barclays.
Xie says China has no choice: “We have to reform the real estate market, even if it takes 20, 30, 40 or 50 years. Otherwise, crises will return.”