On the edges of Beijing, identikit housing projects stretch for miles on end, a partially complete Legoland concreting hundreds of acres of villages and farmland that once made up the capital’s outskirts.
After decades of Maoist hostility to private property, restrictions on the purchase of private property were finally lifted in the early 1990s: It didn’t take long for a mainland middle class to emerge, one as obsessive over house prices as any of their Western counterparts.
That middle class, now the Chinese government’s bedrock of support, is under threat from its crumbling real estate market—and with it, the Chinese Communist Party’s credibility. For years, Beijing has tried to rein in prices but kept giving up under pressure from stakeholders. Now, it’s ditching those attempts entirely in the hopes of re-inflating the bubble that once underpinned China’s economic growth.
Unusually for most developing nations, China’s urban class was largely grandfathered into its equity, enjoying a relatively smooth transition from tenant to landowner. Well, sort of—private citizens still can’t own land in China, but they can lease it from the government for 70 years, a period that was widely understood to be extended indefinitely. So-called boomer urbanites often got to buy their property at a peppercorn sum from their work unit (or danwei) upon retirement.
If you were a rural resident, then it was a riskier lottery: Some people got generous payouts from selling their land to their local government, whose officials sold it onto private developers while pocketing hefty “commissions.” Others got a punch in the face and a bulldozer through the front door. “If farmers had received the full market value for their land and enjoyed normal investment returns,” economist Arthur Kroeber wrote, “they would now have an additional five trillion yuan in household wealth.”
Once the market was in place, however, house prices went up, and up, and up. Property became the most reliable source of investment for Chinese families, who did everything they could to get a foothold on the ladder. With unreliable and government-fiddled stock markets, 70 percent of Chinese wealth is held in real estate while land sales remain the main source of income for those same corrupt provincial administrators.
That meant a lot of complex deals building on other deals. “In 1998, my dad bought our first 93-square-meter apartment (two rooms, one bathroom on the top floor of a six-story building with no elevator) for 180,000 [yuan],” said Chen, a state worker from a typical middle class coastal family who did not wish to be named or even have their location identified.
“[Dad] paid 50,000 kuai [or yuan] as down payment, took out a ‘personal loan’ from the property manager, and paid him off in three years. He was making 5,000 to 8,000 kuai per month because of his ‘side hustle’ as a manager of a laundry factory. He wouldn’t have been able to afford the apartment if he’d only had his job in the state-owned steel factory [making 2,000 to 3,000 kuai per month].”
That apartment was later sold in 2008 to a family friend about to marry, doubling their return; the Chen family moved the windfall into their current newbuild, which cost 970,000 yuan (or roughly $143,000). “It’s under my name because I’m 26 years old and was able to take a 30-year loan from the bank,” Chen explained. “Without the ‘first bucket of gold’ [a reference to the original property], it would be way harder to get [a mortgage for] the second, which is now worth 2 million [yuan] … as the average requirement was around 35,000 yuan and as a [state employee], I make 7,000 [yuan] per month.”
China’s chaotic, breakneck development has long invited admiration—whether from taxi-riding author Thomas Friedman or Western advocates of authoritarianism’s supposed meritocracy, like Daniel Bell, as well as the occasional jeer, along with doom-mongers like author Gordon Chang, who first predicted China’s imminent “collapse” in 2001.
Even when a crack or two started to show, various absurdly ambitious projects—such as a scheme to turn a humdrum business district in Tianjin, a port city 83 miles from Beijing, into “China’s Manhattan”—national Potemkin fests like a panda-shaped solar farm, or simply boldfaced scams like a “straddling bus” or Disney-beating theme park chain that turned out to be further real estate plays were shrugged off as the inevitable excess that accompanies such unprecedented growth.
Prices have dipped and wavered before, but never has the bubble come so close to bursting as when both multinational investiture and developer, Evergrande, began unraveling in early 2022, a long-heralded eventuality that a complacent Chinese President Xi Jinping appeared to see then as no cause for serious concern.
Even as sales dropped and construction tailed off, the cost of housing remained stubbornly unaffected, partially a result of just how much venture capital is tied up in dead stock but also how much resistance there is on mainland streets toward any attempts to manage prices.
Famously, an edict that a married couple can only purchase a single property led to a slew of “fake divorces,” many of which turned real after one partner betrayed the other, landing both sides in court. To add further confusion and potential for conspiracy, different restrictions applied to the policy in different cities at different times, with the Beijing municipal government attempting to switch the rules in 2021, a policy that will likely be quietly ignored by regulators in 2023.
As Chen related, “My friend Tina got a ‘fake real’ divorce to get a second property in her [catchment area], so her daughter can have access to better public schools. She and her husband even signed legal documents, stating that the husband will use 60 percent of his salary to support his ‘soon to be ex-wife’ and their young daughter [in case he refuses to remarry].”
Today though, China’s officials are scrambling to heat the market up rather than cool it down.
Various municipal governments began loosening restrictions in early 2022, hoping for a moonshot that might alleviate declines in both birth rates and homebuying, with piecemeal initiatives before national regulators stepped up in November 2022 to announce a raft of credit-easing plans to reassure homebuyers.
Perhaps more significant though has been the surprisingly rapid reversal of some of Xi’s core policies: Along with shedding draconian zero-COVID measures that have battered China’s working and middle classes alike for the last 18 months, another one of Xi’s “common prosperity” mantras has been quietly dropped from a key policymaking forum.
The phrase “houses are for living in, not speculation” no longer featured in 2022’s annual Central Economic Work Conference—a confab that, like China’s regularly scheduled release of quarterly economic data, was postponed without explanation before proceeding in late December. Restrictions on real estate borrowing are also likely to be scrapped.
These are all likely signs that even Xi worries his previous economic edicts, along with endless draconian lockdowns, have spooked markets beyond the state’s usual rescue formula of policy tweaks and boosterism.
Instead, China’s largest state bank has just thrown a $431 billion credit lifeline to those developers partly responsible for this debt crisis, a decision that could only have been endorsed by a (perhaps) newly cognizant Xi.
Back in August 2022, a provincial cadre named Deng Bibo became an object of ridicule for urging fellow officials at a Hunan trade fair to “buy one property, then a second. Bought a second? Buy a third and fourth.”
Deng’s unguarded comments quickly drew contempt from those who now fear themselves trapped on a housing ladder beset by snakes while inadvertently revealing that Xi’s decadelong anti-corruption crusade has barely dented his underlings’ wealth, which is still mostly parked in renminbi and domestic property, partly due to the mainland’s export controls and unattractive capital markets.
Deng’s opener—calling for “our comrades and leaders” to “take the lead in purchasing houses”—would make little sense without acknowledging the extra income generated by party bosses’ dirty deals.
Even Xi’s official salary is only $22,000 a year; a provincial-level director, meanwhile, only makes around $2,664 per annum. Yet apartments in Hunan’s provincial capital of Changsha were selling at around 15,500 yuan (or $2,288) per square meter before the crash, meaning an average one-bed flat cost $200,000 minimum—while mid-level cadres could apparently afford multiple.
Still, this wholesale corruption came with an upside of sorts: widespread belief in a “guaranteed bubble”—the reasonable fallacy that prices were guaranteed to rise (or at least never fall) because social stability was not only baked into the system but officials themselves were personally vested in it.
Of course, the market was never entirely without risk. I knew one mainland family that lost the majority of their wealth on a $50,000 deposit in 2018 for a development outside Shenzhen that never got finished. And while it’s common to take out a mortgage for a not-yet-finished property in many countries, there’s a local legal twist to it that has caused further headaches: In China, the lender can go after the borrower, as well as developers, if they wish to reclaim any unpaid debt.
Because hardly anyone realizes this, real estate has always been seen as the safest and strongest form of wealth—in part due to a strong belief that the government would never abandon investors. Hence the palpable shock, at least among those with virtual private networks or nimble access to censored sites. This year video captured hordes of hired thugs beating middle class protesters who had gathered outside the banks in Henan to demand access to savings they believed were lost during a real estate Ponzi scheme. (Meanwhile, another friend still in China but trying to leave expressed astonishment at the existence of the videos—so heavily censored was their coverage.)
This has left a palpable sense of panic among prospective homeowners who wonder if their apartments will even be built—along with frustration from both foreign and domestic stakeholders who fear a perfect storm might be about to swamp both the commercial and buy-to-invest markets entirely.
As with the unmitigated spread of the omicron variant, there are worries that the crash could affect rural areas in ways that are hard to quantify due to the relative lack of attention on the country’s interior. (The concept of affordable housing only recently became a subject of urgent concern.) Many people who went to the cities to make money fled when lockdowns lifted, and “even migrants in the city would be hard-pressed to meet someone from HSBC [a British financial company],” Dexter Roberts, author of The Myth of Chinese Capitalism: The Worker, the Factory, and the Future of the World, observed when I asked him about access to mortgage markets last year.
Roberts considers the Chinese market “too big to fail,” although he observed further issues with getting loans (“There’s a bias toward central banks [only] helping out people at the [state-owned enterprises] level”) as well as rural revenue (China lacks a sales tax on capital gains and fears introducing one) and taxation (it’s “regressive, not redistributable at all”). With no income from land sales and few developers willing or able to build, another stimulus will barely touch the sides.
Yet this dwindling confidence in the value of housing is not yet universal.
“I’m very concerned about the current state of the property market but also optimistic that if the government can correct its COVID mitigation and property policies, the property market can be healthy again,” said Andrew Rothman, an investment strategist at Matthews Asia. (Since then, Beijing has dramatically dropped those controversial mitigation efforts.)
Although some of China’s coastal middle classes are feeling buyer’s regret on their half-million-dollar newbuilds, there are still many like Chen and their extended family who seem content to enjoy comfortable retirements relatively unscathed. Other domestic stakeholders, perhaps complacent on four decades of growth, appear to have no idea there’s even a blot on the horizon.
One recently married friend’s Chinese in-laws have been hounding the newlyweds to invest millions of dollars in the jewel that is Inner Mongolia’s residential market. He points to rental yields in China, which are relatively poor by Asia-Pacific standards, according to the Global Property Guide.
“A simple way to think about these percentages is take 100 percent and divide by the yield percent to get a number of years. That’s how long it would take in rental income to make up the purchase price [assuming it was a cash buy]. So at 2 percent, buying an apartment [in China] is the same cost as renting it for 50 years,” the long-time China resident, who preferred to remain anonymous, explained. “In parts of Hanoi, it’s under 15 years.”
Meanwhile, who should resist the returns offered by another of Xi’s vague grand ideas: Xiong’an New Area, a whole new, completely unnecessary city, built by fiat, whose announcement prompted a typically bizarre buying frenzy back in 2017? None, some experts say. Others fear major risk and reality checks despite the big man’s backing.
For now, state media is continuing to push real estate as the ultimate (possibly only) vessel of wealth generation for the next five-year era, with national broadcaster CCTV airing a three-part documentary showcasing Xiong’an New Area in September. But as the rapid volte-face on “unshakeable” zero-COVID demonstrates, there may no longer be many certainties in Xi’s China, even when it comes to previously core policy.
