A recent report on the development of China’s property market prepared by the consulting team at ENHANCE International was cited in The Economist’s article, “China's property crisis claims more victims: companies and Unsold homes are contributing to a balance-sheet recession.”

The Economist reports that China’s property market is facing a deep adjustment. The court auction of 87 flats in Changsha underlines many of the problems with China’s property sector. It highlights speculative activity and regulatory loopholes, while also showing how rich Chinese often have had few investment options other than apartments. Most of these investments now seem shoddy, as many of the homes have gone unsold.

Foreclosures have been rising rapidly. According to an estimate from ENHANCE International, courts foreclosed on nearly 800,000 properties in 2023, an increase of more than 50% compared with 2020. The number continued to rise in the first half of 2024, with increases of over 40% in several large cities. As courts put these properties under the hammer, fewer and fewer are selling. Just 15% of foreclosed and auctioned homes found buyers last year, despite an average discount of around 33%.

Unlike the United States during the 2007 subprime mortgage crisis, household foreclosures have been kept to a minimum in China. Many banks are giving buyers extensions on mortgage payments or lowering interest rates. City officials worry about foreclosures causing social instability, and many courts have chosen to delay filing foreclosure cases to give buyers time to catch up on their mortgage payments.

In fact, the main holders of properties subject to foreclosure are not households but companies. Chinese firms often mortgage commercial and residential properties for bank loans or investment purposes. As a result, rising foreclosures are evidence that China’s companies face a “balance-sheet recession,” in which spending is reserved for paying down debts instead of making investments. As corporate borrowing cooled and households repaid loans early, net bank lending even turned negative.

Overall, the growing distress among companies may pose a long-term challenge to China’s economic recovery.

To read the original article, please visit: https://www.economist.com/finance-and-economics/2024/10/10/chinas-property-crisis-claims-more-victims-companies