China’s property sector has been under pressure for at least two years, and initially came to a head in June last year with the infamous liquidity crisis at Evergrande, China’s second largest property developer.
The sector is once again in crisis, as thousands of homebuyers are refusing to continue making mortgage payments on properties whose developments have been delayed.
👉 How did China’s Property Crisis start?
To provide some background, a popular real estate sales strategy in China revolves around incentivizing homebuyers to close on deals for homes that were yet to be built. This did not prove to cause any major issues until Covid lockdowns started disrupting work flows and supply chains, causing several real estate developers to delay projects. Due to rising costs, a few developers have also inadvertently had to declare bankruptcy.
Since then, construction has been stalled as the remaining developers face cash flow and liquidity problems. With homebuyers in at least 100 developments now holding back their mortgage payments, the liquidity squeeze for developers is compounded even more.
⚠️The Insight: For Investors / Traders⚠️
Some analysts are now worried that we are witnessing the start of a mortgage crisis in China similar to the subprime crisis that led to the Global Financial Crisis in 2008. China’s banks are reported to have as much as $9.2 trillion in exposure to the real estate sector, with most of that in the form of mortgage loans. In the last year, nearly a third of the top 100 developers in China have defaulted on loans.
👉 There have been concerns about China’s real estate and finance sectors for years, but there are now some tangible signs of trouble. Investors should be very careful about investing in either the banking or property sectors in China. The lack of corporate transparency in China compounds the risk further on Chinese stocks.
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